Sometimes home buyers encounter the hurdle of not fully meeting the requirements for obtaining a home loan. When this happens, a lender might ask for a co-signer as further insurance against someone defaulting on their agreement.
Being asked to be a co-signer is both an honor and a potential concern. Right now, you may be worried about how your decision could impact a relative’s ability to secure a comfortable home. Feeling worried about how this decision could affect your finances or personal relationship is also normal.
Figuring out whether it is safe to co-sign a mortgage loan is easier when you ask yourself these questions.
Why Does the Primary Borrower Need a Co-Signer?
Home loan lenders look at multiple factors to make their decision on an application. The applicant’s current income, debt to income ratio and payment history are all under review.
If an applicant comes up lacking in any area, the lender may ask for a co-signer. The reason for the request can give you insight into how safe it is to co-sign. For instance, you might feel safer if the person has a stable job but lacks a lengthy credit history. This is common with younger adults who may not have had to make regular house or car payments before now.
Do You Have the Ability to Make Their Mortgage Payments?
A co-signer takes on the responsibility for the loan without having a stake in the property. This means that you are obligated to make any payments that the primary borrower misses. If you fail to make up for a missed payment, then this can go on your credit history. This can, at times, create discord among close family members.
Having a serious conversation with the person asking you to co-sign is critical. You’ll want to make sure that they’ll communicate with you if they cannot make a payment. You might also want to discuss how they will pay you back for any payments that you have to make on their behalf.
Do Your Future Financial Plans Support Having New Debt?
The new loan amount will go on your credit history. This could impact your ability to make a large purchase, such as a house for yourself. Talking to a financial planner can help you get the full scope of how this decision could impact your ability to get what you want or need in the future.
Have You Explored Other Options?
If you are still on the fence about co-signing, then you may be able to reach a compromise. If you are in the financial position to do so, then you might buy the house yourself. Parents often buy houses for their adult children and set up a rent-to-own agreement.
Helping the borrower explore different types of loans could be another option that makes it easier for them to get an application accepted. Some loans require a low down payment or credit score, which could make the borrower more attractive to lenders.
Can You Take Precautions Against Potential Problems?
If you do choose to co-sign, you do have ways to protect yourself financially. Consider setting extra money for payments aside in a special account. You can also request that the lender contact you if the primary borrower skips a payment. This gives you more control over how you manage your finances.
Like many big decisions in life, there is not an easy answer to this question. Your choice to co-sign depends upon your financial status, relationship to the borrower and the viability of choosing other options.
In most cases, it is safe to co-sign a mortgage loan, provided that you take a thorough look at the situation. Working with a loan specialist can help you break down the financial impact of co-signing, so that you make the best decision for your situation.