Did you get hit up to co-sign for a home loan? While it's a great gesture and a fine way to help someone out, there are some things to look out for and consider before moving forward.
The first thing to know is that the payment patterns will show up on your credit report. Even though you're just a co-signer you're also now responsible for the payments. If timely payments are made, your own credit scores will be helped out. On the other side, if there is a payment made more than 30 days past the due date, that will show up as well. Oftentimes a co-signer won't know about the late payment until the credit report is reviewed. It's also a good idea to take a gander at the applicant's current credit report. If it's a clean slate, you can feel more comfortable about signing your name to the paper. If however there are some dings here and there you should probably think twice.
Not only will the payment patterns show up on your report, so too will the balance. You might suddenly find a new $50,000 liability showing up on your report as well that you didn't know about. If your own debt ratios are pushing the limits, this new debt can harm your ability to qualify for a new auto loan or other type of installment loan.
Second, even with a co-signer, some lenders will still review the applicant's ability to repay the debt even though you've agreed to help out. You also want to be assured the applicant's can pay on their own.
You'll also want to find out about current rental history. How much is the current rent compared to what the new mortgage payment would be? If they're roughly the same that's a good sign but if there's a rather dramatic difference between the two that could portend problems ahead. When someone is used to paying $1,000 per month in rent and the new mortgage payment will be $2,000, that's quite a monthly payment shock. Lenders don't like such payment shock and might decide to decline the loan at the outset.
As a co-signer, and your income is needed to help qualify, be prepared to provide your own personal documentation such as paycheck stubs and tax returns. This is the way lenders verify your financial ability to take on the new debt. In addition to the mortgage payment, monthly amounts for property taxes, insurance and mortgage insurance will be added.
Finally, if the payments on the mortgage do in fact fall behind and otherwise eventually can't make the payments, lenders can legally file a lawsuit and receive a judgment. If late payments have piled up, the total amount to get caught up can be quite a bit.
Again, helping someone out buy a home is a good thing, you just need to do your own homework ahead of time.