Should you go it alone or ask for the help of a friend or relative when applying for your home loan? We’ve compiled some scenarios wherein a co-signer might make sense.
You’ve saved diligently and are confident that homeownership is in the cards for you. You’re already picking out a color scheme for your new digs. But maybe you’re not sure you’ll qualify on your own. Before you allow your nerves to get the best of you, it is worth taking a breather and considering an alternative option. In certain cases, you can ask a co-signer to help boost your application. Of course, there are important considerations associated with this route, and we’re here to help you weigh your best options. Here’s what you need to know about adding a co-signer to your loan:
What is a mortgage co-signer?
A mortgage co-signer, also known as a non-occupying co-borrower, serves as a sort of guarantor on a mortgage, without receiving any of the advantages of a traditional co-borrower. In essence, that means that the co-signer lends their name and credit rating to the mortgage application without receiving rights to the property itself.
Commonly, parents come on as co-signers to help their children purchase their first homes. In other cases, they may be close friends or family members who are willing to demonstrate their trust in the borrower’s financial solvency with their own positive financial record.
When might you need a mortgage co-signer?
There are a variety of circumstances that may call for the addition of a co-signer to a mortgage application. Here are a few of them:
Insufficient income If your lender determines that you do not have sufficient income to qualify for the mortgage, or that you have too much debt for the amount of income you have provided, they may require a co-signer in order to show additional income on the application. This may be necessary if much of your income is tied up in assets or if you are purchasing the home as a real estate investor and will be using rental income to pay the mortgage. This is usually the primary reason people choose to add a co-signer.
Self-employment If you have recently left your salaried employment to try your hand as an entrepreneur, congrats, that’s an awesome achievement! In some instances though, that might mean you struggle to show the income history necessary to qualify for a mortgage. You may be able to put your underwriter’s mind at ease by adding a co-signer, who can help you secure a loan while you establish a more consistent financial record and more robust cash-flow month-to-month. (Separately, you can take the time to learn more about how Simplist makes life easier for self-employed mortgage borrowers).
Recent employment change If you have recently changed employers or entered into a new professional field, your employment history may not be sufficient to qualify for a mortgage. Though there are exceptions to the rule, many lenders like to see at least a two-year history of relevant work experience, or a combination of relevant educational and work experience, in order to approve a mortgage.
Lack of credit history Maybe you are just starting out on your credit history. You got the job, you got the assets needed, your credit history doesn’t have any blemishes, but you haven’t been using credit for too long. A co-signer with established credit may be the simple solution to overcome your lack of credit history. The lender would be more at ease lending to a person with a long credit history as they can make up for your lack of credit patterns.
Major life changes Life changing events can significantly alter your finances, bring about a residential relocation, or otherwise cause upheaval to your financial life. These events include college graduation, extended illness, disability, divorce, or the death of a spouse. If you’re in a period of change, you may require a co-signer to demonstrate stability and financial resources.
The risks of co-signing a mortgage
While your parents, friends, or family members may love and trust you, it’s fair to say that co-signing your loan means they are taking on a certain degree of risk. Mingling assets with anyone carries significant uncertainty, and we’d be remiss if we didn’t explore some of the potential downsides:
Higher debt-to-income ratio Because your co-signer accepts liability for your debt, co-signing your mortgage will give him or her a higher debt-to-income ratio. This may make it harder for your co-signer to qualify for financing throughout the life of your loan. It is worth double-checking that they’re not hoping to take out a car lease or purchase their own new home in the imminent future!
It is best practice to always pay the new loan from your bank account and not from a joint account with the co-signer. This would minimize the impact on them for any new credit they wish to obtain since they can prove that they are not the ones paying for the debt in practice.
Decline in credit score Similar to the point above, increased debt may cause a decline in your co-signer’s credit due to an increase in the co-signer’s financial obligations. This could have repercussions both on his or her creditworthiness and on the terms of the financing they are able to obtain in the future.
Relationship Risks If you are unable or unwilling to repay the loan, you risk a significant rupture in the relationship with your co-signer. Even if your inability to repay the mortgage comes about through no fault of your own, it can cause financial hardship for your co-signer that may take years to repair. This can be especially painful in the case of a close friend, family member, or parent who has assisted you by co-signing.
How to remove your co-signer from the mortgage
Should your co-signer wish to be removed from your mortgage, you may be able to refinance the loan. This is usually possible once you have demonstrated income stability that was not there on your original application. If your overall financial or work history picture improved over time, lenders could be more willing to work with you without a co-signer. It typically takes at least 6 months before your qualifications would change enough to refinance the property solely into your name.
We can’t co-sign your application, but with more than 50,000 loan options, Simplist can help you find the right mortgage for your specific circumstances! Talk to a friendly Simplist loan advisor today about the types of loans available and how you can pre-qualify for a mortgage, with or without a co-signer.