How To Cosign Responsibly On A Mortgage
Buying a house is an exhilarating stage in life. A home to call your own. Many people who today are homeowners would not have been able to get to the...
Buying a house is an exhilarating stage in life. A home to call your own. Many people who today are homeowners would not have been able to get to the point of buying their house without the advantage of a cosigner. According to Forbes, 1 in 6 adults have cosigned on a loan at some point in their life.
A cosigner is a great way for someone to get a mortgage when they don't have enough of their own income to qualify for a mortgage loan.
Cosigning may seem like a very simple and win-win favor you might do for the benefit of your family member or friend. However, cosigning is not always as simple as it sounds. There are risks involved and it is something that should be taken very seriously.
What is a cosigner?
One of the many requirements for a mortgage is having enough of your own financial income to prove to the bank. A bank will not want to approve a mortgage if they do not feel comfortable that the income is sufficient for the applicant to afford the monthly mortgage payments.
The issue is that so many people out there just don't make it. Whatever income they manage to scrape together, is sometimes not enough to get approved by the banks for a mortgage. To give those thousands of people who want to buy a house the opportunity to do so, even if their income is not up to par, banks will accept a cosigner on the loan. A cosigner is someone who signs on your mortgage loan along with you. How does that help? The additional income that the cosigner has is counted as part of the income you need on your mortgage loan. That enables the bank to approve your loan, if all else is in place.
The cosigner is responsible for the loan just like the primary borrower is. That means the cosigner is fully responsible for making sure the mortgage is being paid monthly. The cosigner doesn't have to make the payments every month but in a case where the primary borrower doesn't make their mortgage payments, the cosigner is liable and may very well have to step up to the plate, with the payment in hand. Having a cosigner gives the bank a sense of security. They know that if the primary borrower defaults on the loan then they can go to the cosigner to demand payment.
If you are in need of a cosigner, you are most likely to turn to those people closest to you. And vice versa. If you have someone close to you who is going for a mortgage, they may very well approach you to cosign on their loan. Cosigning takes a huge amount of responsibility from the cosigner. When you cosign on a loan you are putting your finances at risk, as well as your credit, and your relationship with the primary borrower.
Here is how you can cosign responsibly so that instead of saying no to your dear sister who wants you to cosign on her loan, you can do it and be confident you are doing it right.
Don't cosign for strangers
Firstly, and rather simply, you should not be cosigning for any person on the street. There is so much you have to look into before you put your name on any loan, cosigning is definitely reserved for people you know and trust. You can find yourself cosigning for a family member, a friend, an acquaintance, or someone close to you. But don't go further than that because it is playing with fire. Just like you would not lend cash out to anyone on the street, so should you not cosign for just anyone. You should only cosign for someone you trust will not end up having you in a sticky, money mess.
Check the affordability of the primary
Before you cosign on a mortgage loan, you should make sure to check the affordability of the primary borrower. The primary borrower can be going into their mortgage knowing that things will be tight. They may know that the income they are making will just about cover the monthly mortgage payments, or maybe not even cover the payments. They may be hoping for the best and be a bit too unrealistic about affording their mortgage. You, however, do not have to ride this unstable dream. The primary borrower can hope and pray that their mortgage bill will get paid each month, but you are entitled to look things through and ensure that the funds for the mortgage payments are in place and that they will be paid in a proper manner.
Sit down with the primary borrower and go through their income. Check whether their source of income is solid. Find out if the primary borrower has a car or a different loan. Ask the primary borrower if there is any other debt that they are busy paying up. You should come out with a clear picture of what the income to debt ratio of the primary borrower is. If it seems to you that the primary borrower has what it takes financially to pay their mortgage, then good.
If you get the feeling that the primary borrower has too much debt with too little income, and in no way will be able to afford this mortgage, you can do as follows. You can nicely tell the primary borrower that the way their finances are at this point, it does not seem possible that they will manage to cover this mortgage. Suggest to the primary borrower that they continue shopping for a home with the hope of finding something cheaper and more affordable. As for your part, you can tell the primary borrower that it is beyond your comfort zone to cosign on a loan that you feel they will not manage to pay. You are not obligated to cosign on a loan you are not okay with.
Check your financial status
If you cosign on a loan, that means you are undertaking to make the monthly payments should the primary borrower fail to do so. Though you generally hope the primary borrower will do their duties and make the necessary payments, you may need to prepare for the worst, if you choose to accept the risk of cosigning on a mortgage.
Even if you have already checked the financial eligibility of the primary borrower, now is the time to check your own financial standing. Do you have the funds to finish paying off the debt should the need arise? If you are barely making it to the end of the month in your financial situation, it may not be wise to accept a new loan that is not yours. Though you hope that the primary borrower will pay out their loan until the end, you do have to prepare for the worst. If the primary borrower ends up defaulting on the loan, it will fall on your shoulders and you must make sure you will be able to handle that financially since it can put you into tremendous financial distress.
Ask for escrow
Make things official and ask for escrow. Ask the primary borrower to give you three months worth of mortgage payments. Take the money and put it in escrow. You can use it to pay the mortgage at a time when the primary borrower misses a payment. Escrow is when something is kept in custody by a third party, and is usually released when a condition is met.
In the case of cosigning on a loan, you can decide upfront that you will use the money to pay the primary borrower's mortgage payment if the payment is late. This ensures that fewer, or no, payments will be late and that late marks due to a missed payment will not make it on to your credit report. Of course, the primary borrower should not be relying on the escrow or use it as leeway to go easy on paying the mortgage.
Make sure you get loan statements
According to Robert Harmon, legal advisor for HelpMeBuildCredit.com, there is no federal law requiring banks to send statements to co-signers. The FTC and CFPB recommend the cosigner ask to receive monthly statements from the lender. Lenders sometimes send monthly statements only to the primary borrower.
Once the mortgage is in play, do not just sit back and relax. Rather, ask the bank to send the monthly loan statements to your address as well. It is important for you to be on top of the payments to make sure they are made in a timely and orderly fashion. Therefore, a simple request from the bank to also send the loan statements to you can save you from a lot of unnecessary headaches.You should review the monthly statements as soon as they come in the mail and make sure the payments are made on time. If you ever find that a payment was missed, then immediately contact the primary borrower to hear what happened. If necessary, make sure to step in and make a payment immediately in order to protect the mortgage from going into default and damaging your credit.
Ask for a refinance
Before you cosign on a loan you want the primary borrower to confirm with you that once they are eligible for their own mortgage, then they will refinance their home and remove your name from the loan.
Refinancing a mortgage loan is known as a way to secure a lower interest rate on a mortgage. The interest rate percentages on mortgages are always fluctuating. One day it can be low, the next day higher.When someone goes rate shopping for a mortgage, they are obviously looking out for the cheapest mortgage interest rate out on the market. Once they close on their mortgage, the rate they close at is the rate the mortgage payments will be paid out on. But no homeowner has to forever stay stuck with the mortgage interest rate they closed on. Everyone can always refinance their home.
Refinancing a home is when you give up your first mortgage and take out a new mortgage. The bank pays up your first mortgage with the new one. Your new mortgage loan gets the interest rate you buy at the time of refinancing. The benefit of refinancing a home is that you can get a lower interest rate on your mortgage. A beneficial time to refinance is when the interest rates are at incredibly good rates. Refinancing is your opportunity to lower your interest rate on your mortgage. When you cosign on a loan, you can use the concept of refinancing to your advantage. Although the primary applicant is not eligible for their mortgage on their own right now, it may very well be that in a year or two from now, they will be in a different financial position and they will be eligible for the mortgage loan on their own.
You do not have to stay committed to cosigning on the loan for the duration of the mortgage, which can be 30 years or so. Instead, you can set a deal with the primary borrower. Ask for them to commit that as soon as they are eligible for their mortgage loan, then they will refinance their home. The primary applicant may not be excited about having to refinance as soon as they are eligible for their loan because it may come out at a time when the mortgage interest rates are high, rather than low. But a deal is a deal and the primary borrower will need to keep their part of the commitment.
This is a favor you can do for yourself when you agree to cosign on a loan. You should get yourself off as soon as the primary borrower refinances since just the way their financial status changed and they became eligible for their mortgage, so too, things can go crashing down. You don't want to still be on the loan when the primary borrower is unable to make their mortgage payments.
You have the right to say no
Helping a fellow friend or family member is a wonderful thing to do. But sometimes, you may be better off keeping finances and close acquaintances separate. Because there are so many risks involved in cosigning on a loan, you want to think long and hard if it is the right thing for you to do.
There are many aspects to take into account.First of all, it has the possibility of damaging your personal relationship with the primary borrower. You can start out doing it as a favor for your friend or family member but things can go haywire from there on. If the primary borrower fails to pay the loan or leaves you with much of the dirt, will that not affect what you think of the primary borrower? Things may not stay pretty between the two of you. Cosigning may take your relationship and rock it up, or even worse, end it.
Helping out your friend or family member may simply not be worth it.Cosigning can also hit your credit. Since the loan is on your report as your own, any defaults on the account will affect your credit. Late payments, missed payments, collections, and the like will directly hit your very own credit. You are also risking your financial situation. If you do end up having to pay the debt due to the primary borrower's fallout, that takes a huge amount of assets from you. If you feel you are in a place where you can not cosign, just say no. The no, can save you from a rough and tough road that you are not obligated to take.
If you do go ahead and cosign – Your responsibilities
Once you have covered every nook and cranny of cosigning and you have made the decision to cosign, you will have to start gathering documents together. Even though you are not the primary borrower on the mortgage, if you do cosign, then the bank will ask you to provide some papers.
Firstly, you will have to allow your credit to be pulled. From the credit pull, the bank or lender will access your credit score, credit report, and credit history. The bank or lender will evaluate whether you are a responsible borrower and that you can be trusted to step up to the obligations of a cosigner. Obligations, as we mentioned earlier in this post, include paying up the debt of the mortgage loan should the primary borrower fail to do so.
Although you may have made the decision to go ahead and cosign, the bank or lender still has to agree to have you as the cosigner and inspect your file to make sure you are eligible to cosign on a mortgage loan.
You will also have to provide proof of income. That is, after all, the reason you were asked to cosign in the first place. The primary borrower does not have sufficient income so you are stepping in to supplement the primary borrower's income. Along with income, you will have to show your employment status and subsequently, proof of employment. The bank or lender may ask you for more financial information and documents to include when the primary borrower submits the mortgage application.
You don't get the rights to the property
Do you feel that after all that headache, investigating, and the application process, never mind the harrowing decisions making whether to accept the request for cosigning or not, you should at least have a share in the property the mortgage is for? I would think so too yet unfortunately, it is not so. You will not have the right to the property, even if you cosigned on the mortgage loan. The property, whether it's a mortgage on a house, building, or barn, belongs to the primary borrower and not to you.
Keep your credit clean for your kids
Cosigning is also something you may, one day, want to do for your own child. In order to cosign on a loan, as we have mentioned in this post in several instances, you need good credit. You may think that once you get to a certain stage in life or once you retire, that you can let your credit fly. You may think you will not be taking out any mortgages any longer or do things that require good credit, such as getting a car lease. But what you forget is that a child of yours may need your help to get a mortgage and that the only way you can help out your children to get a mortgage is if you keep your credit in good standing. Or you can choose to pay out the mortgage in its entirety:). But for the regular people amongst us, do yourself and your children a favor and stay on top of your credit so that if the day comes when your child needs you to cosign on a mortgage, you can happily do so.
To keep your credit score high, make sure to always have at least one or two credit cards open. Keep your three oldest cards open forever so that your credit history stays strong. Do not carry any balances on your credit cards above 29% of the credit limit. Also be careful to make your payments on-time.
There are many parts to cosigning, including risks and responsibilities. If you know what you are in for and make sure to do it right, you are cosigning responsibility. And if you choose not to cosign, that is not a bad decision either.
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