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A Guide to Co-Signing
Co-signing is an awfully nice thing to do for those that need a little help qualifying for a home. Usually it's a parent helping a child, but it can also be for a relative or close friend. It's certainly not an uncommon request and, for those who are able, it's a great way to get someone into a first home. But before you get too much further, there are some things you definitely need to know.
The first is realizing what happens if someone you co-signed for defaults on a loan. A lender typically won't foreclose on a property until two or three payments are showing up as more than 30 and 60 days past the due date. A single late payment won't start foreclosure proceedings but more often than not when these payments become seriously delinquent the co-signer remains in the dark until things start to deteriorate rapidly. If you co-sign, make sure you get copies of monthly statements for the mortgage and monitor them closely.
Another thing to consider relates to the previous point. When you agree to co-sign, those payments show up on your credit report as if you're the one that's making them. If those payments are indeed made on time, or at least not more than 30 days past the due date, your credit scores will actually improve. On the other hand, if delinquent payments are made, those two will show up on your credit report. These late payments will negatively affect your own personal credit scores. Many times, unbeknownst to you. You should make it a condition that you want to see a recent credit report before making any such agreement.
Opening up new credit accounts will also affect your credit balances. By co-signing on a mortgage, the new payment, including principal and interest, taxes, insurance and mortgage insurance when needed, will be tacked on to your own personal debt. Should you decide to apply for a new mortgage or other larger purchase on credit, the amount you currently owe can affect whether or not you can obtain an approval.
Maybe a gift would be a better option? To help someone qualify by co-signing, you're just as responsible for the mortgage as the primary borrower. Instead of co-signing, and you have the funds available, consider providing some financial assistance in the form of a gift. This would lower the amount borrowed and make it easier to qualify. Providing a gift also leaves out any longer-term solution. Co-signing means you're on the existing note. A gift can help but doesn't affect your credit lines. And if you do agree to co-sign, ask if this would be a long or short term situation. Do the primary borrowers need help as it relates to income and debt? If one of the primary borrowers is currently out of work or perhaps just graduated and will find work soon, it can make the decision a little easier.
And one final note here about co-signing. If one or both of the primary borrowers has damaged credit, co-signing won't help. When there are multiple borrowers on the same application, lenders use the lowest middle credit score of all the borrowers. If your credit score is 780 and their qualifying score is 500, you credit won't help. The lender will use the 500 as the qualifying score and likely headed for a turn-down.
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