Since 2016, increase regulations and mortgage rule changes have made co-signing or gifting down payment quite common to help buyers qualify to purchase a home. Lenders and mortgage default insurers have been active by putting some great “family plans/co-signing” products in place. These products make it easier and cheaper for co-signers to be removed once the main applicant can qualify on their own. Though extremely common and overall minimal risk if the borrower is able to make the mortgage payments, it is really important to be transparent and understand the risk for the person who is co-signing.
Things to know:
- The co-signer is agreeing to be a backup up and make payments should the borrower fail to perform.
- Missed or late payments will also negatively affect the credit record of the co-signer.
- The co-signer may also be liable in any legal actions, should they occur. His or her own property could be at risk in a lawsuit.
- The mortgage payment and the debt on the property will also be “owed” by the co-signer, thus increasing his or her debt load which may be a problem if needing or wanting to obtain credit later.
Co-signing is a generous gift, but it can put their credit or more at risk if the borrower defaults or neglects on mortgage and property responsibility. Co-signers are essentially co-borrowers, their income, credit and liabilities will be reviewed no differently than the borrower. Another thing to keep in mind is that a co-signer might not be able to co-sign if they don’t have enough verifiable income or already too much debt load to take on the loan.