Everyone likes to have a lot of money for different purposes. The requirement for money will not end for most people, even if they have good monthly earnings. Money is needed for everything these days, including purchasing food and water. Even though you have a good salary, it will not be enough for some of your requirements. Usually, people require more money at once if they purchase a car, house, or land or have certain medical emergencies. In this article, we’ll talk about co-signing a mortgage loan and what to consider.
Taking a loan is preferred by most people during such situations as it can provide them with the necessary amount of money. Nowadays, most people are taking mortgage loans to meet certain urgent or immediate requirements. As a security measure, banks or other loan providers are asking for a co-signer who will be in charge of the loan without payment from the borrower. Co-signing a mortgage loan will give you a big responsibility, as you will become a security for the borrower. Check out free real estate tools like Fire calculator, Irr Calculator and prorated rent calculator.
What is a mortgage loan?
A mortgage is an agreement between the money borrower and the lender, wherein the render has to provide his assets for guarantee. It is a type of secured loan wherein the lender will get the right to take the borrower’s property (provided as a guarantee for the loan) if they fail to repay the money and the interest within a certain period (as per the mortgage or agreement). Thus, a mortgage loan allows you to take funds by providing an asset for the guarantee, like a house, commercial property, or any other collateral. Read more on How to Get a Mortgage for an LLC-Owned Rental Property.
Who is a co-signer in mortgage loans?
As mentioned earlier, mortgage loans require you to provide collateral for a guarantee. But there are cases wherein people cannot get loans from a bank or a loan provider or are not qualified for a loan. In such cases, another person will have to stand as a guarantee for the borrower, called a co-signer. So, co-signers are individuals who will have to take full responsibility for paying back a loan taken by the borrower. They have to agree legally to stand as the guarantee. If the borrower fails to pay the mortgage loan with interest, the co-signer is responsible for paying it back.
Basic requirements to qualify as a co-signer for a mortgage loan.
As per the details above, anyone can become a co-signer for a mortgage loan. Usually, co-signers would be close relatives or friends who completely trust the borrower. But not all people are allowed to sign the mortgage as a co-signer, as certain requirements or qualifications exist.
- The individual must be completely willing to become the co-signer
The person must be firm with his decision to become the co-signer for a loan agreement. They must be completely willing to take all the responsibility for the loan if the borrower fails to pay it back. They need to sign the agreement and provide a guarantee form where they confirm their willingness.
- Relation with the borrower
You can find many banks or other loan providers which accept unrelated or distant related people as co-signers. But others will only permit a close relative to be a co-signer. They will have to prove their relationship to become the co-signer for the mortgage loan.
- Excellent credit score
Most borrowers usually require a co-signer if they have bad credit, which does not allow them to take the loan. So, the co-signer must have an excellent credit score. To be qualified as a co-signer, the individual must have a credit score of at least 670. 750 is usually considered a good credit score, which guarantees the co-signer qualification.
- Income of the co-signer
The income details of a co-signer are considered mandatory by many loan providers, even though they have an exceptional credit score. The co-signer must have a good income that is necessary for the payment of the loan taken by the borrower. Usually, the lender will calculate the debt-to-income ratio to determine whether an individual can meet the loan requirements.
Some important things that you must consider while co-signing a mortgage loan
The primary thing you must consider while being a co-signer is that it is highly risky, and you will be given a big responsibility. It would help if you remembered that you would not get many benefits from being a co-signer. But you will make things easier for the borrower you are standing as a co-signer. Understanding all the risks of being a co-signer would be best, especially if the borrower is taking a large loan.
Risks of being a co-signer
- It might affect your credit score.
If the borrower fails to make the loan payments on time, or if they miss the payments, it will affect your credit score. When you become a co-signer, the borrower’s debt (the particular loan) will be considered your debt in the credit. If you already have a loan, the co-signed loan will be added. Thus, it will look like you have more debts than you can cover with your income. So, being a co-signer will reduce your credit score, which might make it hard for you to get a loan if necessary.
- You will have to hold responsibility for paying the loan
If you become a co-signer for a mortgage loan, you and the borrower are responsible for paying the money back. So, the lender might ask you to pay the money if the borrower fails to pay it back on time. You might also receive legal notice from the lender for extended cases. Thus, it can easily lead you to a worse situation.
- Lenders can take legal action against you.
If the payments are not made properly for a long time, the lender can take legal action against the co-signer. It will negatively impact your credit score, making it harder for you to qualify for another loan.
- The mortgage loan might affect the relationship.
If you become a co-signer, you will have to pay the loan amount if the borrower faces some difficulties. As it is regarding money, there are high chances that both the co-signer and the borrower might conflict. It will result in damaging the relationship to a great extent.
Advantages of being a co-signer
As mentioned earlier, co-signing a mortgage loan is more beneficial for the borrower.
- The borrower gets low-interest rates.
If you co-sign a mortgage loan, you will place your financial resources as a guarantee. Thus, it will help the borrower get better interest rates on loans. It can also help your family members or close friends (borrowers) get a good credit score.
- Helping your close relative
By being a co-signer, you will be helping your close relative or family member to get a loan. If you are in debt to them in any other way, this would be a better way to support them.
Information and documents that you should provide for being a co-signer
- Identification requirements
It includes official documents with your details like address, social security number, and many others.
- Financial records
Financial records consist of income verification, debt and assets details, and credit verification. It includes providing documents like income tax returns, bank statements (debts), investments and bank balance details, credit scores and reports, etc.
- Proof of relationship
Relationship proofs include any document or other proof showing the relationship between the borrower and the co-signer. Some lenders will only accept close relatives as co-signers to ensure security.
Other things to consider if you are going to become a co-signer
Being a co-signer is always risky, no matter how much you trust the borrower. Certain issues can pop up unexpectedly, wherein you might get into deep trouble.
- Always stay connected with the primary borrower for whom you are the co-signer. Make sure that you are having frequent communication with them.
- It would be best if you have access to the repayment history of the loan so that you will be notified with alerts. It will keep you well-informed about the loan, and you will not have to get a shock unexpectedly.
- Try to make the loan payments on time if the borrower cannot pay them. By doing that, you can ensure that your credit score does not suffer much.
- Contact the borrower if necessary so that there will not be many issues, even if they made late payments.
Is there any way to get your name off the co-signed loan?
It would be best if you remember that you will be taking full responsibility by co-singing a mortgage loan. Thus, even though there are a few methods to remove yourself from the loan, it is not easy.
- Usually, the lender will not agree to the request to remove your name from the co-signed loan. It is because, by doing that, they will put themselves at greater risk. Thus, the lender must confirm that the borrower will be able to repay the loan. After then, they can create a new agreement without a co-signer.
- A borrower can also help remove your name from the co-signer position by taking another loan to repay the original. It is a good choice if the primary borrower’s income increases and he has a good credit score.
- The borrower can also sell the asset in the mortgage loan to pay the debt and remove the co-signer.
Co-Signing a Mortgage loan: Conclusion
Co-signing a mortgage loan will put you in a position with some risky responsibilities. You will have to take responsibility for paying the loan if the primary borrower fails to do it. Apart from that, there are several other disadvantages, like a reduction in your credit score. So it would be better to think twice or more about co-signing a mortgage loan, even if the borrower is a close relative. Here you can find some important information that will help you understand all about being a co-signer and its risks.