Pros and Cons of Co-Signing a Mortgage

Pros of Co-Signing a Mortgage

1. Get into the Market Earlier

   In the current real estate climate, it may not be possible for some home buyers to get into the market without a co-signer.

2. Build Equity

The sooner you purchase a home, the sooner your equity starts to build. With rising real estate prices, getting into the market sooner may be beneficial.

Cons of Co-Signing a Mortgage

1. Responsibility:

   Cosigning for a mortgage can be a big responsibility, and it's essential to understand the risks before making a decision. As a co-signer, you are guaranteeing the loan and are equally responsible for making sure the payments are made on time. If the borrower fails to make their payments, it can severely impact your credit score and financial stability.

2. Borrowing Power Reduction:

   Cosigning for a mortgage means that the entire mortgage amount is now reflected as a liability on your credit bureau. This means that if you’ve cosigned for a mortgage, you can borrow LESS money for yourself. For example, if you’ve cosigned for a mortgage loan with a payment of $2,000 per month, your own personal borrowing power has been reduced by $200,000. Should you choose to cosign, make sure that you’ve considered your future borrowing needs and consulted with your mortgage broker about the impact.

3. Credit Score

   One of the risks of cosigning for a mortgage is that it can harm your credit score if the person repaying the loan has poor repayment. If the borrower misses a payment or defaults on the loan, it will be reported on your credit report and can negatively impact your ability to get approved for credit in the future. This can make it more difficult (or even impossible) to get approved for a mortgage, car loan, or credit card of your own. In addition, you could be stuck paying a higher mortgage rate because of someone else's mistakes.

4. Financial Risk

   Another risk is that you may be held responsible for the remaining balance if the borrower defaults on the loan. This can be a significant financial burden and can cause serious financial stress. Additionally, if the borrower cannot make the payments and the house goes into foreclosure, you could lose any equity you have built up in the property. (Never mind the fact that it's completely ruined your credit score). Lastly, consigning for a mortgage reduces the money you can borrow for other ventures. As a result, you may not qualify to purchase a new home or vehicle for yourself. Therefore, before signing, you should consider that it may affect your ability to meet your future borrowing needs.

5. Relationships

Cosigning for a mortgage can also affect relationships. If the borrower cannot make the payments, it can cause a lot of tension and stress between you and the borrower. Therefore, it's essential to have an open and honest conversation with the borrower about the risks and responsibilities before deciding on how you will proceed. It's important to remember that cosigning for a mortgage is a big responsibility and should not be taken lightly. Be sure to carefully consider the risks and ensure you are comfortable taking on the responsibility before deciding. It's always recommended to consult with a licensed mortgage broker for personalized advice and guidance.

Top 5 Questions to Ask the Borrower BEFORE Co-Signing a Mortgage

1. Are you comfortable creating a joint bank account so that we both have visibility that the mortgage, home insurance and property taxes are paid on time each month?

2. What is your fallback plan if your monthly income is reduced or eliminated?

3. Can you put 2-3 months of the mortgage, property tax and insurance payments into the bank account so that we have a buffer if there is a reduction to your monthly cash flow?

4. What is your 1/3/5 year plan for increasing your income so that I can be removed from the mortgage in the future?

5. What is your intention with the house? Will you live in it? Or rent it via short-term or long-term rental?

In conclusion, cosigning for a mortgage can provide great opportunities but it can also have serious consequences. It is essential to weigh the potential benefits and risks before deciding. It's always recommended to consult with a licensed mortgage broker about this or other questions and concerns as they relate to mortgages.