Have you been dreaming of buying your own house, but your credit score is far from perfect? Thankfully, there are still some options to look into if you know your chances to get qualified for a loan are pretty low.
One of the common ways to get a loan is to find a co-signer. With their help, you’ll have more chances to get a loan to finance your mortgage with a decent interest rate without waiting till you can improve your credit score.
What Is a Co-Signer?
A co-signer is a person who becomes responsible for paying the loan alongside the primary borrower if they cannot qualify for the loan themselves. Typically, a co-signer has to have a higher income and a better credit score than the borrower. And if the borrower is unable to make payments, the co-signer is legally obligated to repay the debt.
A borrower with a co-signer becomes much more attractive in the eyes of lenders for a few reasons. First, now two people share the responsibility of making payments, which increases the chances of the loan being paid and reduces risks for a lender. Additionally, one of these people has a high credit score, solid income, and a good history of credit payments, proving further it is safe to approve the loan.
Basically, a co-signer lets the borrower use their name and credit history to reinforce their application and make it more attractive for the lender. As you could have guessed, it comes with its own risks for the co-signer that they have to be aware of before agreeing to co-sign a loan.
Process of Co-Signing a Mortgage Loan
While applying for a loan with you, your co-signer would have to go through the whole process. They would need to present their ID, social security number, and some financial documentation. It includes W2 forms, income tax returns, bank statements, and any other documents the lender might find important. Also, the lender would have to run a credit check and check the co-signer’s credit score.
Who Can Become Your Co-Signer?
Many young people who simply don’t have a sufficient credit history yet use their parents as co-signers to finance their student loans or car loans. Similarly, you can ask your family member or a close friend to become your co-signer.
Certain lenders and types of mortgage loans require proof of relationship, while others might not request it at all. For example, if you apply for an FHA loan, you must have a long history of relationships with your co-signer. This include:
Spouses and ex-spouses
Aunts and uncles
Close friends (with the confirmation of your long-standing relationship).
Risks for a Co-Signer
You should keep in mind that if you get a loan with a co-signer, your actions will affect them heavily. Unlike a co-borrower, a co-signer does not have any rights to property ownership, so there are not many advantages to co-signing a loan. Usually, people do it only to help out their loved ones.
First of all, if a borrower is not able to pay monthly installments, a co-signer would have to cover it by themselves on time. What’s more, this can be reflected in their credit report and negatively affect their credit score.
The best advice would be to discuss beforehand how you should act if such a situation occurs. When you ask your family member or a friend to become your co-signer, be completely honest about your financial situation. Co-signing the loan is a risky decision and, even though they might be more willing to help you if you sugarcoat the current state of affairs, this can backfire in the nearest future.
Also, consider giving your co-signer full access to your loan account, so they could check by themselves if all the payments were made in time. This will provide them with some peace of mind as, after all, their reputation and further credibility depend on how this loan is handled by you.
Finding a co-signer might not be the option for everyone. For starters, if you’re not able to qualify for the loan by yourself, you should carefully think if it is a good idea to seek a loan in the first place. Maybe, it would be wiser to hold off for a year or two and put your financial situation in order first. Seek a co-signer if you’re sure you make enough money to cover monthly payments and you have a stable job to make sure you will not bring financial pressure and stress in the life of your loved one.
Mariia serves as editor-in-chief and writer for the Rentberry and Landlord Tips blogs. She covers topics such as landlord-tenant laws, tips and advice for renters, investment opportunities in various cities, and more. She holds a master’s degree in strategic management, and you can find her articles in such publications as Yahoo! Finance, Forbes, Benzinga, and RealEstateAgent.