5 Co-Signer Considerations

What you need to know before asking someone to co-sign on a mortgage loan

Buying a home is a significant milestone in anyone's life, but it can be especially challenging if you have bad credit. A low credit score can make it difficult to qualify for a mortgage and can lead to higher interest rates, making it more difficult to afford the home of your dreams.

However, lenders often allow a co-signer to step in and sign for a loan with you. If you are fortunate enough to have someone in your life who would be willing to co-sign for a mortgage with you, a co-signer with good credit can increase your ability to obtain mortgage approval.

Buying a home is emotional, and certainly buying a home with another person co-signing adds another layer of emotion to the process. Open and honest conversations should be had upfront to mitigate these emotions. Also, planning and research about the pros and cons of co-signing a loan and what a co-signer is responsible for could potentially protect your relationship with the co-signer longer term.

To help navigate these pitfalls, we have put together these 5 co-signer considerations:

1. Identify potential co-signers: Look for someone who trusts you and has a good credit score, such as a family member, close friend, or even a professional acquaintance. It is important to remember that a co-signer is just as responsible for the loan as the primary borrower, so it's crucial to choose someone you trust and who also trusts you, who is financially stable, and who is invested in your future. And then over the life of the loan, take no action to break that trust that the co-signer has placed in you.
2. Have a conversation with the potential co-signer: It's important to have an open and honest conversation with your potential co-signer about the responsibilities and risks involved with co-signing. They need to understand that they will be held accountable for the loan if you are unable to make payments. Commit now to your co-signer that you will always have these open and honest conversations with them about the state of your finances over the life of the loan.
3. Provide financial documents: Your co-signer will need to provide their financial information to the lender, so make sure they are prepared with all the necessary documents, such as income statement, credit report and bank statement. Ensure in advance that they are comfortable providing this information and that it is readily attainable.
4. Consider the long-term commitment of the co-signer: It's important to consider the long-term commitment of being a co-signer. The co-signer can only be removed if you're able to make payments on time and improve your credit score. Once you are in a position to refinance the loan (re-applying and securing a new mortgage with your own credit history), only then will your co-signer be able to remove themselves from the loan.
5. Be aware of overextending yourself: While having a co-signer can increase your chances of getting approved for a mortgage, it's important to remember that it also puts your co-signer's credit at risk. Late or missing payments will negatively impact their credit score. It's important to make sure that you're confident in your own ability to make payments and maintain your creditworthiness. Commit to a budget in purchasing the home, with a monthly payment that is very comfortable. Furthermore, once the home is purchased, commit to a spending budget, ensuring that your mortgage is prioritized.

Closing Thoughts

A co-signer can be a valuable asset when trying to buy a home with bad credit, but it's important to choose the right person for your situation, communicate openly, and be aware of the risks involved. By carefully reviewing these 5 considerations, you can increase your chances of getting approved for a mortgage, you can maintain your relationship with your co-signer, and achieve your dream of homeownership.

No matter what stage you are at in your home-buying process, we are here to help you. We serve the Greater St. Louis Metro area, including St. Louis, St. Charles, Warren, and Lincoln Counties. We have helped hundreds of families purchase homes, many of them working their way through repairing bad credit and buying homes for the first time with very little credit. And we are eager to help you as well! Just fill out the contact form below!