A mortgage co-signer has now become relevant in present day housing market where it is very difficult for many buyers to obtain a home loan. A mortgage co-signer is a person who signs the mortgage documents to assume a part of the mortgage obligations in order to enable the creditworthy mortgage applicant to be approved for the loan. Co-signers, usually, are relatives or friends of the borrower with a good credit history and a stable income. The use of a guarantor increases the possibilities of a favorable decision much higher, especially for candidates with a short credit history or low income. It is equally essential for the borrower and the co-signer to appreciate the function and significance of a co-signer before engaging in such an arrangement.

What Is a Mortgage Co-Signer?

Definition of a Mortgage Co-Signer

A mortgage co-signer is thus a person who will be paying for a home loan in equal capacity as the main borrower. This is an indication that the co-signer is legally responsible for the mortgage repayments should the borrower fail to make them. The credit status as well as income of the co-signer is taken into consideration by the lender at the time of approving the loan and thus the borrower finds it easy to secure the mortgage. But the co-signer does not have the rights to the property, yet, he or she has the same responsibilities as the primary borrower.

Why You Might Need a Co-Signer

There are several situations when getting a co-signer could be needed. For instance, young families who have little credit history or low income can be refused by a lender. Moreover, individuals having adverse credit history or those willing to buy a house for which they would normally not be eligible for a loan, may require a co-signer for their application. In such situations, a co-signer could come in handy in helping to source for the finances needed in getting a mortgage.

Responsibilities of a Mortgage Co-Signer

Financial Obligations

Being a co-signer of a mortgage entails the co-signer to specific responsibilities of the loan agreement. In case the primary borrower fails to make the payments or default on the mortgage, the co-signer is legally liable for the payments. This means that the co-signer must be willing to take full responsibility of the mortgage in case of default by the primary borrower. The lender can go for the co-signer to pay the balance and any other charges such as late payment charges, which may compromise the financial stability of the co-signer. Thus, it is important for co-signers to appreciate the scope of these obligations in order to avoid co-signing.

Impact on Credit Score

Mortgage co-signing can also be directly felt on the co-signers credit score as well, depending on the credit bureau that is used. The mortgage loan shows on the co-signers credit report and any default or late payment by the primary borrower will have a knock-on effect on the co-signer. Thus, even if payments are made on time, the extra debt may worsen co-signers debt-to-income ratio, which will be an issue if the co-signer needs credit for himself in the future. Co-signers should also ensure that they occasionally check their credit status to be in a position to know the impact of co-signing in the long-run.

Legal and Long-Term Commitments

To co-sign a mortgage is to take legal responsibility that can affect one for many years. The co-signer is legally bound to the mortgage for the entire period that it will take to complete the payment of the mortgage which in some cases may take up to 30 years. This long-term responsibility indicates that the co-signer may feel the effects of the financial burden on his or her credit record for quite a long period of time. Further, if the borrower cannot repay the loan and refinance to have the co-signers name off the loan, then the co-signer is held responsible for the loan until it is paid off in full. For anyone who is planning on becoming a co-signer for a mortgage, these legal and long-term obligations are important to know.

Benefits of Having a Mortgage Co-Signer

Improved Loan Approval Chances

A good reason to have a mortgage co-signer is the chances of being granted a mortgage because the co-signer is a guarantee that you will make your payments. A good credit score and a stable income of the co-signer can compensate for the shortcomings of the basic applicant. Co-signers help to decrease the probability of default to lenders because they consider them as extra security. This can be particularly helpful for the first-time home buyers, those who have a poor credit history, or those who have a low income; the addition of a co-signer is likely to improve the mortgage application.

Better Loan Terms

Apart from increasing the likelihood of the loan being approved, a co-signer can also assist in the borrower to get better loan rates. This is because with a co-signer the lenders are assured of their money and hence they can charge lower interest on the loan, take lower down payment or be more flexible on the loan terms. These better terms may mean lesser monthly installments and lesser overall cost of the loan which may make homeownership possible for the primary borrower.

Building or Repairing Credit

Co-applicant can also help the main applicant to create or rebuild his or her credit history. On time mortgage payment have a positive impact on the borrowers credit score, and over time, the score increases to provide better future opportunities. After some time, the credit of the borrower improves, and the borrower can apply for a mortgage refinance and leave out the co-signer completely and continue to rebuild credit on his or her own.

Conclusion

A co-signer of mortgage is crucial in assisting the borrower to obtain a mortgage by providing a better chance of loan approval and better rate. However, the role and the obligations of co-signing are critical, and they have to face potential consequences in the long term. If you are thinking of getting a co-signer or becoming one, then it is important you have a clue on what this entails. Evaluate the benefits and drawbacks, be transparent, and make a decision that is beneficial for both, in compliance with ones financial capacity.