What You Need to Know Before You Co-Sign on Someone’s Mortgage

Written by Posted On Thursday, 02 December 2021 00:00

You just did a good thing. You agreed to co-sign on a mortgage. Especially for first time buyers, qualifying on their own can sometimes be a challenge, especially for those who are having difficulty qualifying due to debt-to-income ratios, coming up with funds for a down payment, having some credit issues or having their very first job right out of school. 

There are indeed issues that buyers need to address. And when someone does indeed need some help, a co-signer on a mortgage can be a real blessing. If this is you, or just thinking about it, there are some things you need to know before you put your name on the dotted line…for someone else’s house.

What are the things to know if you’ve agreed to co-sign?

First, co-signers are allowing someone else’s credit payments to appear on their very own credit report. If someone continues to make monthly payments on time, it can help your FICO scores as well because the solid payment history will appear on your report, boosting your own scores. However, if a late payment shows up, it also hits your credit report. Note, a late payment as it relates to credit scores means a payment made more than 30 days past the due date. A payment that is made on the 10th of the month when the due date was on the 1st won’t have an impact. The only impact of a payment made later in the month when actually due on the 1st might mean a late payment fee.

At the same time, if a late payment is made, you may not be aware of it until you check your own credit report. And if/when it does, your own scores will falter. Not by much initially but if subsequent late payments begin to appear, your scores will be negatively affected. This could mean a surprise if you apply for an auto loan and you’re looking at higher interest rates that you didn’t expect.

Instead of that zero-percent financing you expected, quoted rates might flirt in the 7.00% or higher. You might even be asked to make a larger down payment than originally expected. If the payment is late on an account, you can expect to be asked to make the late payment on the original borrower’s account. Something you might not expect. So, what to do?

First, ask for a copy of the applicant’s credit report before making any commitment. If there are late payment patterns showing up, you might want to reconsider co-signing on anything. If the credit report is clean, you might want to move forward to help the applicants qualify. Second, ask about the current employment status. It’s not automatically a bad thing if someone doesn’t have a current job but if not, that can alert you whether or not someone will be able to pay their bills on time. 

Another side note, the ‘bills’ don’t include things such as utility or cable bills, but credit accounts that would appear on a credit report such as a car or student loans. In such an instance, the prospective borrowers could then use loans that allow ‘alternative’ credit that include payments to utility companies and student loans. Again, not a bad thing but in this instance, you can also ask for payment histories for these alternative credit accounts as well.

It’s always good to help people out, especially your kids or relatives who are just starting out on their credit plans, just know the payments histories of those you’re helping will show up on your report. Most usually it’s okay, but sometimes it’s not.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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