Many people who want to purchase a home are unable to obtain a mortgage. A lender may agree to a loan if the applicant has a co-signer with a steady income, good credit score and debt-to-income ratio within the lender’s guidelines. If a family member has asked you to co-sign a mortgage, be sure to consider the potential risks.
Why Might a Borrower Need a Co-Signer?
Lenders turn down mortgage applicants for many reasons. Sometimes a person doesn’t have an established credit history because he or she recently finished college. Student loans and credit card balances can give lenders pause. Life events, such as a divorce, job loss, illness or spouse’s death, can cause an individual or family to struggle financially.
What Could Co-Signing Mean for You?
Co-signing a family member’s mortgage would mean you wouldn’t have any right to the house, but you would be financially responsible if your loved one didn’t make payments on time. That means you could have to juggle your relative’s mortgage, plus your own mortgage, car payments, utilities, credit card payments, daycare fees, college tuition, groceries and any other regular expenses.
Co-signing a mortgage could affect your credit score. It would raise your debt-to-income ratio, which could make it harder for you to obtain a mortgage, car loan or credit card of your own. If your family member missed payments or faced foreclosure, your credit score could take a major hit.
Is Co-Signing a Good Idea?
It’s essential to consider your family member’s specific situation and why the lender denied the mortgage application. If you have a child or sibling who just earned a degree and has a job lined up but little or no credit history, co-signing a mortgage might be a reasonable decision. If the person is generally responsible and hardworking and you’re confident that the mortgage payments and any student loans or credit cards wouldn’t be too much for him or her to manage, you can set your family member on the path to homeownership. If a loved one has experienced a major life change that threw him or her off course, but things are getting back on track, you can consider co-signing a mortgage.
If your family member’s job is not secure, if he or she is financially irresponsible, or if the house is too expensive, co-signing could be a bad idea. If your relative missed payments, that would affect your financial situation, as well as the lives of anyone who relies on you financially. Other family members would likely offer their opinions and take sides. Family dynamics could get very messy, very quickly.
Think Things Through Carefully
Co-signing a mortgage could help your loved one achieve the dream of homeownership, but it carries significant risks. You know your family. Think long and hard about how secure your relative’s financial situation is, how responsible he or she is, and how your life and the lives of others could be impacted.
