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Can a Cosigner Help You Qualify for a Mortgage?

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If you’re looking to buy or refinance a home but are having trouble qualifying for the mortgage, you might consider getting a cosigner to help.

A cosigner is someone who puts their name on the mortgage to guarantee the debt will be paid if the primary borrower defaults.

Though more commonly used for lesser debts such as buying a car, cosigners can also be used to qualify for a mortgage.

You didn’t hear much about them during the years of the housing bubble, since credit was easy to get and few people needed one, but their use has become more common as lenders tightened their credit guidelines.

In most cases, a cosigner won’t necessarily enable you to qualify for a mortgage, but may be able to help you get a better mortgage than you could have obtained on your own.

That is, a loan with a lower interest rate, smaller down payment or higher loan amount than you could have qualified for by yourself.

Helpful for those just starting out
Cosigners are frequently used by young people who are just beginning to establish their credit.

Others include someone who is just recovering from a major financial setback, such as a stretch of unemployment, a divorce where the spouse ruined the couple’s credit or a retiree on a limited income, to name just a few examples.

A cosigner may not help if you have a terrible credit rating where a lender won’t consider you in the first place, say a credit score in the 500s or below.

When evaluating a mortgage application by two people, most lenders base the decision on the lowest credit score of the two, so a cosigner’s score won’t help you there.

However, if you’re a young person with no credit record and therefore no credit score, the lender may base their decision strictly on the cosigner’s credit score.

Having a cosigner on a mortgage is not something to be taken lightly. In the event of a default, the cosigner is responsible for the entire debt.

This may not be a problem if the property can be sold for an amount that satisfies the debt, but that’s not at all certain in the current housing market.

Parents, close relatives are good choices
When looking for a cosigner, people typically look to relatives, often their parents, who are often willing to help young people establish themselves.

In some cases, children may cosign for elderly parents who have retired.

The key thing is, your cosigner should be someone you know and trust, and vice versa, you’re tying your financial fates together in a big way and neither of you want to be let down by the other.

People sometimes look to friends or wealthy relatives as cosigners, but this can present problems.

If you default on the loan, it can ruin the relationship; and it it’s the relationship itself that deteriorates, you’re still tied together by the loan.

And hitting up well-to-do relatives you don’t have an extremely close relationship with can chill whatever good will you had with them to begin with.

What the cosigner should keep in mind
If you’re the cosigner, you need to approach this very carefully. Remember, you’ll be responsible for the debt if the primary borrower defaults. Are they trustworthy? Reliable?

Why do they need a cosigner in the first place? Are they a young person who hasn’t established credit, or did they already ruin their credit through carelessness? Are you confident they’ll be able to keep up with their mortgage payments?

As a cosigner, you also need to be alert for trouble signs once the mortgage has been made.

Things like past-due notices are mailed to the primary borrower’s residence, not to you, so you need to keep an eye out for warning signs.

You may even want to set up an agreement where the borrower will provide you with regular updates on the status of the loan.

As a cosigner, you also need to be aware of the impact on your credit.

The full amount of the loan counts against your available credit, so you might find it difficult if you wish to buy a new home yourself or borrow money for investment purposes while you’re on the cosigned note.

Also, a foreclosure or other action against the cosigned property will affect your credit as well, which can also make borrowing difficult even if the property is disposed of.

Refinance desirable after a few years
Generally, a cosigner will stay on the mortgage for a few years until the primary borrower can establish good credit.

At that point, you can request to be taken off the note by asking the lender to requalify the loan with just the primary borrower.

Failing that, it may be necessary to simply refinance the mortgage under the principal borrower’s name, which will typically cost several thousand dollars.

For this reason, you don’t want to cosign a mortgage unless you’re confident the housing market in the area in question is stable, declining home prices, such as were seen from 2006-10, can make it impossible to refinance until housing prices recover.

At the same time, cosigning a mortgage can be a real boon to someone who’s responsible with their finances but, for one reason or another, can’t borrow as much as they need or at the best available rates.

Particularly for parents who intend to offer financial assistance anyway, it offers a way to provide significant help without tying up any actual money.

But in the end, the whole thing is based on trust, both parties need to be confident the other will hold up their end of the bargain for it to work.

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