Do you know someone who’s struggling to qualify for a home loan? Have they asked you to cosign their mortgage? While cosigning can be a great way to assist a friend or family member, it also carries significant risks.
Before agreeing to cosign, it's crucial to understand the potential impact on your credit. Cosigning is different from co-borrowing. A co-borrower shares the mortgage debt and typically lives in the home. In contrast, a cosigner agrees to take on the debt if the primary borrower fails to make payments. The cosigner commits to covering the debt but doesn’t reside in the property.
According to FTC Facts for Consumers, 75% of cosigners end up having to pay off the loan if it defaults. Additionally, if the borrower misses a payment, lenders often turn directly to the cosigner for repayment. Whether you're considering cosigning or asking someone to cosign for you, it's vital to be aware of all the benefits and risks involved.
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When someone agrees to cosign your mortgage, they’re committing to take on the loan responsibilities if you default. This isn’t just a favor; it’s a legally binding agreement making the cosigner liable for your debt.
Sometimes, a cosigner is referred to as a "nonoccupant co-client." If the main borrower defaults, the lender can pursue the cosigner for missed payments, regardless of where the cosigner lives.
So why cosign for someone? Often, cosigners help a trusted friend or family member with poor credit secure a loan. For applicants with a weak mortgage application, having a cosigner can make approval more likely.
You might think that a cosigner and co-borrower are the same thing, but there are a few differences. Both of these individuals will take some shared responsibility in helping you take out a loan. However, the difference lies in the benefits of the title.
With a cosigner, there are no benefits for signing on the line for another person. They are simply helping out an individual to secure a loan. On the other hand, a co-borrower does have some interest in this investment. They might be in business with the other individual. For example, two people who want to start a restaurant business would take a loan and be known as co-borrowers.
If you want to buy a home, you will probably need a mortgage loan. However, that dream can turn into nighttime without good credit. When you apply for a preapproval, you might not get the best interest rates or could be denied altogether. You can always ask someone to cosign as a nonoccupant co-client on the application.
Now, you are a more attractive candidate to lenders. The lender will consider both incomes and average out the credit score. Your mortgage will function as if you were the only person on the application. You will make the monthly payment every month to cover the interest, principal, taxes, and insurance. Along with that, you can enjoy your status as a homeowner.
However, the lender can hold the nonoccupant co-client financial responsible for any missed payments. In other words, the lender can take your cosigner to court over any missed payments, and that can leave their income and assets subjected to legal action.
Along with mortgages, cosigning can be done for personal, auto, and student loans. There are some loans that will not allow a cosigner on the dotted line. However, the most common nonoccupant co-client mortgages are FHA or conventional loans. Here’s a look at what is required to get a cosigner for these types of loans.
There are two types of loans that borrowers often need or require a cosigner. These types of loans are FHA Loans and Conventional Loans.
An FHA Loan is a mortgage loan insured by the Federal Housing Association (FHA). FHA loans are popular for first-time homebuyers because an FHA loan only requires a down payment of 3.5% for borrowers with a good credit history. But FHA loans often need cosigners because the borrowers do not have enough credit history on their own to qualify, or they are still recovering from bankruptcy or delinquency.
Conventional Loans are mortgage loans that are not insured by a government program. Conventional loans are more challenging to qualify for and have higher interest rates than FHA loans. Borrowers need to have a minimum credit score of 620 to apply for a conventional loan. Because conventional loans have stricter qualifications, a cosigner can help the borrower qualify for the loan. Mare Mortgages offers the best rates for FHA, Conventional and Jumbo Loans. Find out which loan would work best for you and how much you qualify for?
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As a cosigner, you won't have ownership rights to the property, but you must:
Helping someone get a mortgage by cosigning comes with serious risks, such as:
If you are in a stable financial position and decide to help a friend or family member by cosigning, make sure to communicate regularly to ensure they are keeping up with their payments. Thinking about cosigning a loan? Consult with our team at Mare’s Mortgage to determine if it’s the right choice for your financial future. Our open-door policy ensures we are a trusted financial resource in the Orange County area.
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Cosigning a mortgage is a legal commitment that can have long-lasting implications. When you cosign, you are legally obligated to repay the loan if the primary borrower defaults. This means that your credit score, financial stability, and legal standing can be affected by the actions of the primary borrower. It's essential to understand the full scope of your legal responsibilities before agreeing to cosign. Here are some key points to consider:
Cosigning can impact personal relationships significantly. While it can be a generous gesture to help a friend or family member, it can also strain relationships if financial difficulties arise. Open and honest communication is crucial to ensure that both parties understand the risks and responsibilities involved. Setting clear expectations and boundaries can help maintain a healthy relationship.
As a cosigner, there are strategies you can implement to protect yourself financially. One approach is to set up a separate savings account to cover potential missed payments. Additionally, regularly monitoring the primary borrower's payment status and maintaining open communication can help you stay informed and prepared for any issues that may arise. It's also wise to consult with a financial advisor before cosigning.
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If you find yourself needing to remove your name as a cosigner, there are steps you can take. One common method is refinancing the loan, which can release you from the obligation if the primary borrower qualifies independently. Another option is for the primary borrower to sell the property and pay off the loan. Understanding these options can provide an exit strategy if your financial situation or relationship dynamics change.
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Before deciding to cosign, consider alternative ways to assist the primary borrower. You could provide a financial gift or loan for the down payment or help them improve their credit score by paying off debts. These alternatives can offer support without the significant risks associated with cosigning. Exploring these options can lead to a solution that benefits both parties.
For more alternatives, check out this Bankrate guide.
Deciding whether you need a cosigner is a big decision. At Mare’s Mortgage, we want to help. Call 949-489-8300 to talk to one of our team members who can help you determine if a cosigner is necessary. As the top mortgage lender in Orange County, California, Mare’s Mortgage provides various tools to simplify your mortgage application journey. Whether you’re a first-time homebuyer or looking to purchase a second home, we can quickly help you secure a pre-qualification certificate.
While having a cosigner on a loan can significantly help the loan application, it does come with substantial risk to the cosigner. If you choose to have a cosigner on your loan, make sure you:
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