When Should You Co-Sign A Mortgage?

When you cosign a mortgage, it essentially means that if the primary borrower can’t afford to make the loan payments, you’re on the hook financially. While you’re lending someone a hand, it’s quite a large responsibility. When you cosign, your credit, assets or income are used to help secure the loan. You’re also next in line to make payments should the primary borrower default.

Note that cosigning a mortgage is different from being a co-owner. When you’re a co-owner, you're on the title along with a friend or family member you’re helping. If you’re not on the title, there’s no ownership conferred even if you’re on the mortgage. In turn, you’re both responsible for making payments throughout the duration of the loan.

But when you’re the cosigner, the other borrower depends on your solid credit or income to qualify for the loan. When you’re a cosigner on a mortgage, you often don’t own the house. Someone might ask you to cosign if they don’t meet the income or credit requirements for a mortgage and need someone to help back the loan. You’re only responsible for making payments if the primary borrower can’t afford to.

When Should You Cosign?

You should only cosign if you fully understand the risks and downsides involved. As mentioned, you’re putting your creditworthiness and financial health at risk. Plus, you could be sued and suffer a credit hit if it’s on you to make payments and you can’t. You’re able to handle payments if the primary borrower can’t keep up with them.

Besides helping someone you care about, from a financial standpoint, cosigning doesn’t reap a lot of benefits. You’re being saddled with a lot of responsibility and you’re contractually liable to cover payments.

Thinking of cosigning a mortgage? Here are a few things to mull over:

• Know what you’re getting into. It might seem obvious but treat it as if you are taking out the mortgage yourself, because in reality, you are. Comb carefully over the terms, rates and conditions of the mortgage. It’s not a bad idea to meet with the loan officer with any questions you might have.
• Understand how it affects your debt load. While you don’t have to worry about making payments unless the borrower isn’t able to, on paper you’ll be carrying a larger debt load. In turn, your debt-to-income ratio will be higher.

Besides knowing your legal responsibility, know your rights. The state you live in might have additional cosigner rights, so do your research so you know your protections.

Before you agree to cosigning, understand the risks to your financial health. You should also know how it could potentially affect your creditworthiness.

There are several risks to consider. Let’s say that neither you nor the primary borrower can make the mortgage payments. This being the case, your credit score could take a hit.

And because you’re taking on a sizable debt load, it increases your debt-to-income (DTI) and could limit the amount of credit you can borrow. You might be turned down for future debt, such as a business loan or car loan.

Another major risk? You could be sued for the debt, and the lender will look to you first to handle payments if the primary borrower isn’t able to. It might seem weird, but then again, you’re the one with stronger credit and a healthier financial position.

If you’re being asked to provide assets (whether that’s cash reserves or collateral, such as jewelry, valuable artwork, your car, or furniture), know that you might lose these assets should the borrower default.

And on a more personal level, if you’re cosigning for a good friend or close relative and things go south, it could put a strain on your relationship.

If you’re leaning toward cosigning a mortgage, you’ll want to do all you can to mitigate the risks. For instance, be sure that you can afford the payments. Should the worst-case scenario arise, and you end up being responsible for paying the mortgage, are you in a financial place to take over those payments?

Talk it out with the primary borrower. Before you agree to anything or sign any paperwork, discuss it with the borrower. Besides sharing any concerns and thoughts you had about agreeing to be a cosigner, see if the other party has any concerns.

Make sure you receive copies of all the important documents. This includes the loan agreement, warranties and the Closing Disclosure, which details the cost of your mortgage, such as your annual percentage rate. In case there’s a tiff between the borrower and lender, you’ll want to have these papers handy.

Ask the lender to notify you if the terms of the loan change or if the borrower ends up missing a payment. Getting a heads-up will help you deal with any issues and prepare to make mortgage payments.

See if you can negotiate your liability. For instance, maybe you can limit it to just the principal amount of the loan and not the interest. What’s more, ask to not be obligated to cover attorney fees, late fees or court costs. Request all this in writing as an addendum in the contract.

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