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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.
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.
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.
