Should You Cosign on a Mortgage?

by Jennifer Johansen 10/11/2020

Should you cosign on a mortgage loan to help someone else buy a house?

Hopeful home buyers who lack the necessary credit history, W-2 income or overall income versus their debt can face problems getting a mortgage lender to approve a loan. Borrowers with a 43% or higher debt-to-income ratio may learn their income doesn't suffice. Yet if a cosigner steps up, promising to pay the mortgage if needed, the loan might be approved.

If you are the one who steps in, it's highly likely that your name will actually be on the title. Most lenders want it that way, so the asset can be pledged as collateral by both of you.

Are You Prepared to Do More Than Simply Cosign the Loan? Should You?

So, if the mortgage company asks you to serve as a co-borrower, not just a cosigner, understand the lender's expectations. Does the lender expect you to become a co-owner? If so, your name will appear, along with the primary borrower's, on the deed — even if you never set foot in the house and don't expect to pay anything.

If the person you are helping ever gets in a bind and can't make a mortgage payment, you'll be second in line to pay. And your credit report will be dented if you don't.

Were you a mere cosigner, you'd be asked to pay the debt but never have a claim to the value of the home. In other words, mere cosigners get liability for the debt — without the asset.

What Does a Good Outcome Look Like?

Of course, you want the person you're helping to enjoy living in the home, to pay the monthly mortgage and, ultimately, to apply for a new loan that refinances the debt and turns the primary borrower into the sole borrower and the sole owner.

Even if you are 100% sure all will go as planned, it's a good idea to have a lawyer draw up a binding agreement that memorializes the primary borrower's intent to let you off the title, deed, mortgage and homeowner's insurance policy by a date certain after closing on the home. It will keep the primary borrower focused on making regular mortgage payments and developing strong credit, anticipating the refinancing application process.

When the primary buyer successfully refinances the home mortgage, it will be time for you to take your name off the title. You can sign a quitclaim deed to release yourself from ownership.

Then you can congratulate yourself for enabling someone to buy a home. And congratulate the new homeowner for keeping both of your credit ratings as strong as your relationship.

About the Author

Jennifer Johansen

Jennifer is passionate about the Real Estate business, and has been involved in related family businesses in construction, architectural millwork, and finance for 20 years. She and her husband relocated to Naples, from New York, 10 years ago, although her family has owned property on Marco Island since the 1980's. She has a Bachelor's Degree in Psychology and a Dual Master's Degree in Counseling and Education. She has acquired many necessary skills that are useful in Real Estate from being in the field of Counseling for many years. She holds the belief that building rapport is vital to helping her clients have a positive experience, while achieving their goals. She is very thorough and detail oriented, and has formed many close relationships with professionals in related fields, such as law, title insurance, home inspectors and other contractors. She aims to offer concierge- level service to her clients at every price point. When time permits, she enjoys spending time with family and friends. Having grown up on the South Shore of Long Island, and enjoying her summers on Fire Island, she loves any activity related to salt water, boating and the beach. Additional hobbies include gardening, art, and studying nutrition, wellness and naturopathy. She is knowledgeable about Naples and Marco Island Real Estate, in estate areas, golf/gated communities, and waterfront properties. She is a member of The Naples Board of Realtors and Marco Island Area Association of Realtors.