Should You Have a Co-signer on Your Mortgage?
A common question we hear is whether or not someone should have a co-signer on their mortgage. The short answer is that it depends. Here are a few things to consider as you explore your options.
Co-signing a Mortgage Only Helps One Party
Let’s pretend that you want to buy a house. You’re tired of renting other people’s homes and are ready to start building equity for yourself. Maybe you just got married or had a kid and have decided it’s time for this big step.
…but you have bad credit. Not only that, you don’t really have the savings required to make a sizable down payment. You’re afraid your mortgage will have a high interest rate, if you can even get approved for one at all.
Luckily, you have Mom around. Mom has a great credit score and has offered to co-sign on your loan.
The problem is that Mom doesn’t really get anything out of the deal. Sure, she might have some good feelings about helping her kid buy their first home. But financially, she gets the short end of the stick. Because if you run into a situation where you aren’t able to pay the loan, the bank holding the mortgage can now come after your Mom!
In other words, she’s taking on some of the risk, and chances are good that you didn’t include her on the title of the house, right? So it’s a one-sided deal.
Co-signing a Mortgage Affects Credit Scores
In the above scenario, Mom’s credit score will be affected by being a co-signer the loan. This makes sense, because she’s signing up to shoulder the burden of the loan if you aren’t able to make payments.
If she doesn’t plan on making a major purchase anytime soon, it may not matter. But what if her car is on it’s last leg and she’s ready for a new one? Or she is tired of living in the same house she’s been in for 30 years and wants to upgrade (or downsize?) Maybe she’s ready to start a business and could use a small business loan.
A lower credit score will impact Mom’s ability to get a great interest rate on those loans. Sure, it will go back up over time, but she may not want to wait.
Co-signing Loans Impacts Relationships
Relationships are tough enough as it is. If you get someone to co-sign a loan with you, it may have a negative impact on your relationship with that person.
They might be glad at first that they could help, but later they might regret it for one reason or another.
- Their credit is impacted, as mentioned earlier
- Debt-to-income score is increased
- They may get more stressed, wondering if you’ll be able to keep up with payments
Is it guaranteed they’ll harbor these negative feelings? No, not necessarily but it happens a lot.
Should you have a co-signer for your mortgage? It’s up to you, but just keep these things in mind as you think about this option. In general, we don’t recommend it unless you absolutely need it to qualify for the loan you want.
For some personalized advice, reach out to one of our Art of Homeownership Mortgage Professionals. Once we have a better idea of your current situation and goals, we can help you determine the best path for you.