One of the most misunderstood things in the areas of mortgage finance is cosigning. What it means, what it does for the loan, and what it does to your financial future. It’s a bit murky what the reality is versus what you may hear or read. If you are thinking about cosigning, or you’ve been asked about co-signing on someone else’s mortgage, maybe even a family member or a friend, here are some things you need to know.
Cosigning means you are obligated on the loan. For example, if your family member asks you to cosign on a mortgage it is because they need an anchor borrower to offset the mortgage payment obligation. Let’s say you are the anchor borrower for your brother. You become as equally responsible for making that mortgage payment as your brother regardless of whether you reside in the home or not. This means that if your brother doesn’t make the house payment, the responsibility of making that mortgage payment falls on you. So, you should only cosign for someone you completely trust.
Say it’s a 30-year mortgage loan and wish to remove the cosigner, it is selling or refinancing. Maybe your brother is self-employed, and he’ll show higher income next year and he’ll be able to refinance you off. Maybe they’ll be coming into cash, or some sort of financial life event might change. Then you can be refinanced off the house or they’ll sell the house therefore removing you from the obligation. These are things you’re going to want to discuss as it relates to your decision making about whether you should or should not cosign for another person.
Let’s just say for argument’s sake, you proceed, and you go cosign for your brother. You automatically might be thinking “I cosign for my brother, I’m not going to be able to get a mortgage loan for myself, right?” Or “it might hurt my lending ability”. Well, that’s not necessarily true. If you cosign for your brother, and your brother is making the mortgage payment. If he has a specific 12-month history of making that mortgage payment that could be documented with bank statements. The mortgage payment on that property including the principal interest taxes and insurance does not negatively affect your debt-to-income ratio for a new mortgage. The key is that the lender needs to use the conventional guidelines that specifically allow them to offset that house payment with the documentation from the person who you cosigned for. In this example, 12 months of mortgage statements showing the money leaving the bank statement going directly to the creditor is exactly what is needed to offset the mortgage payment. This subsequently improves your ability to borrow because that cosigned obligation that you cosigned for does not hurt your qualifying mortgage ratios. Most companies will tell you to cosign for someone else, which automatically hurts your credit. Well, if that mortgage payment is made on time, and in satisfactory condition, that’s just simply not the case. The difference is finding someone who understands what a cosigned obligation is. What the guidelines are, versus someone who’s just reading off numbers from a script. You heard that right, who you use for mortgage matters! This is something to consider the next time you’re purchasing or refinancing a home.
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