As prices of homes have increased steadily, it has been more difficult for first-time home buyers to enter the real estate market. Often first-time home buyers will turn to relatives to help with a down payment or co-signing on the loan. However, all parties involved need to go in with their eyes wide open before agreeing to this type of arrangement. To do this, first meet with a qualified mortgage loan officer to determine what a buyer might qualify on their own and then what they would qualify for with a co-signer. Next, it would be wise for both parties to meet will a financial planner to make sure they are on the right track with their decisions. The financial planner can help determine if the overall transaction is realistic. Often the primary borrower will end up borrowing more than they can really handle, then the co-signer is asked to step in to help out – and that can put a strain on their relationship.
It is important for the primary borrower to know what they are asking of a potential co-signer and also for the co-signer to have an understanding of what they are getting into.
Here are a few items to discuss between the co-signer and the primary benefiting buyer:
Co-signing a mortgage will affect your credit. If the person you are co-signing for doesn’t make the payments, it will be reported to both party’s credit report. This could lower the co-signer’s credit score and affect their ability to get a loan of their own. Make sure you feel comfortable being responsible for making the payments if the other person doesn’t.
Speaking of responsibility, as a co-signer you are “jointly and severally liable” for the loan. This is a fancy way of saying that if the person who is the beneficiary of you being a co-signer suffers a job loss, you are responsible for making the payments if you want to maintain good credit.
As a co-signer, the loan will be added to your total debt ratio. If you are not planning on applying for a loan of your own anytime soon, that may not matter to you. However, if you are, the co-signed loan will figure into your total debt payments and might affect your ability to qualify for a loan. According to Jessica Shanahan, mortgage loan officer at Premier Lending in Boulder, once the loan has seasoned for a year, the monthly debt will no longer be considered if the cosigner is applying for another mortgage.
Get ready for a loan application! Often co-signers think all they will be doing is signing their name at closing. Not true! A cosigner will be required to go through the same loan application process as the primary borrower. That means providing all your financial information to the lender for them to assess your credit worthiness. This can be a significant and time-consuming experience.
Think back to the initial meeting with the mortgage loan officer and financial planner. Now consider whether or not co-signing with the primary borrower is really a benefit. If the proposed payments are more than the primary borrower can afford, you will likely be called upon to help with those monthly payments. This is fine if you are prepared to do so and can handle it.
Other options to consider when helping a first-time home buyer or anyone needing help:
Consider gifting enough down payment so that the loan amount is low enough for the primary borrower to qualify on their own. If a borrower can come up with 20% down payment, they can also eliminate private mortgage insurance on conventional loans, making it easier to qualify.
Consider buying down the interest rate to lower the payment to a level where the primary borrower can qualify on their own.
By Duane Duggan. Duane is an award-winning Realtor and author of the book, “Realtor for Life”. He has been a Realtor for RE/MAX of Boulder since 1982 and has facilitated over 2,500 transactions over his career. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail Duane at DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.