Younger home buyers frequently look to parents or grandparents to help them get into a first home. However, rising home prices and interest rates are presenting challenges for first-time buyers these days, resulting in some turning to co-signed mortgage loans.
There’s little doubt such joint purchases are on the rise. Of home purchase loans in the U.S. in 2017, the latest year for which data is available, 22.8 percent included a co-signer, up from 21.3 percent in 2016, according to real estate data company ATTOM Data Solutions.
What should you know about co-signed mortgage loans?
Start by speaking to a lender or a financial planning professional and take no action until you have that conversation.
First, as co-signer, you’re 100 percent responsible for the obligation. If the person who’s benefitting from the co-signing loses his or her job and can’t make mortgage payments, you’re now responsible for payments.
Second, co-signing the mortgage will affect your credit. Any delinquency will appear on your credit report. This could affect your ability to get credit in the future—and the interest rate you’ll qualify for—if you apply for a home, auto, personal, business, or student loan.
Third, even if the mortgage payments are made on time and in full each month, being a co-signer on the mortgage can count against you when you’re trying to qualify for future loans. That co-signed loan takes up part of your debt-to-income ratio and restricts your ability to borrow additional money for your own purchases. For that reason, if you have plans to purchase a new car or home in the near future, talk to the lender about how this act of generosity will change your borrowing capacity.
Fourth, your debts will be looked at. As a co-signer, be prepared to provide paperwork to meet the same credit requirements that the borrower is subject to. These include bank statements and income tax returns. Your debt as co-signer will be considered in the loan approval process, with the expected outcome that debt and income from two borrowers will lower the debt-to-income ratio for the loan. For conforming loans, Fannie Mae and Freddie Mac will allow a “blended ratio” DTI that combines the incomes of the occupant and non-occupant co-borrowers. This can help when you aren’t going to live in the house and have most of the income, a common scenario when parents help a child buy a home.
Fifth, as co-signer, consider whether your help is truly helping the buyers. If they could not afford this home without your contributions, is it appropriate for you to offer help? Do they have the cash flow to make the monthly payments? Do you have the capacity to make the payments if they fall behind? Consider whether they are better off in a smaller, less expensive home that they can qualify for on their own.
It’s important to note, it remains the responsibility of the home buyer and the co-signer to talk to a lender or professional financial planner to understand the ramifications. However, taking these points into considerations can help set you on the right track.