While millions of Americans chase the dream of owning their own home every year, it can be a challenging process. First-time homebuyers especially face obstacles that can derail their plans. Low credit scores, high debt, and no savings for a down payment are a few of the many issues that can cause their homebuying journey to screech to a stop.
What can hopeful buyers do if they can’t qualify for a mortgage loan on their own? One of the best solutions is to find a cosigner.
What Does a Cosigner Do?
A cosigner is a person who agrees to shoulder the financial responsibility of the mortgage loan if the main borrower fails to meet the contract’s obligations. A cosigner is essentially a co-borrower, even if they don’t reside in the property.
When Is It Smart To Get a Cosigner?
Several scenarios are beneficial for buyers to get a cosigner on their mortgage loan.
- You have credit issues. If you’ve had recent late payments or other credit missteps, you may not qualify for the best mortgage loan options (or at all). A cosigner with excellent credit scores can help widen your options.
- You don’t make enough money. If your income doesn’t meet mortgage requirements, having a parent or sibling as your cosigner shows the lender you aren’t a high risk. Since they are assured they’ll get the loan repaid (by your cosigner, if not by you), lenders are more likely to approve the mortgage.
- You don’t have enough of a down payment. Traditional mortgage loans required several thousand dollars as a down payment. If you don’t have that saved, your choices could be limited. Enter a cosigner, who may be able to help you get approved for a loan with a smaller percentage down.
Benefits of Getting a Cosigner
Having a cosigner on your mortgage loan gives you several advantages, especially if you’re in one of the above situations.
- You may qualify for a better interest rate. If you don’t have good credit, or don’t have credit at all, qualifying for a mortgage loan may be impossible. Even if you do qualify, you most likely won’t get the best rates available. With a cosigner, however, your interest rate can be based off their credit scores and financial information, which can help you attain a lower interest rate. Even a point or two lower rate can save you thousands of dollars over the life of your loan.
- You may qualify for a lower down payment. If you don’t have a sizable chunk of money saved for a down payment, you may not be able to get into a mortgage loan. A well-established cosigner may help you qualify for a mortgage program that allows a smaller amount down.
- You become a homeowner! If there are obstacles (like not enough income or less-than-stellar credit scores) blocking your path to homeownership, a cosigner may be the only option for getting you into a home.
Who Can Be Your Cosigner?
Cosigners can’t just be anyone. Depending on the loan program you’re using, they may have to be a family member and/or a U.S. Citizen, provide a Social Security number and meet specific credit scoring and financial requirements.
Cosigners cannot be the property’s seller, builder, real estate agent, or anyone else who has a financial interest in the property being sold.
What Are the Negative Aspects of Having a Cosigner
While there are many benefits, homebuyers need to know about a few downsides of using a cosigner to get a mortgage loan.
- Late payments affect the cosigner’s credit. Cosigners are just as tied to the mortgage loan as the main borrower. Late payments or non-payments can tank a cosigner’s credit scores.
- The mortgage debt can decrease a cosigner’s borrowing power. A cosigner may not be able to qualify for other loans because of the cosigned mortgage loan.
- Cosigning can negatively affect the relationship. If, for whatever reason, the main borrower can’t fulfill their mortgage loan contract, if falls on the cosigner. This situation can cause friction and may damage the relationship.
If you aren’t able to qualify for the mortgage loan you need, finding a willing cosigner may be the best way to get into a home. Think carefully about the decision and talk it over with the potential cosigner in an honest, open conversation.