More and more often, the topic of co-signing on a Mortgage is being brought up both during my initial inquiries and Pre-Qualification conversations. I’m presented with questions regarding Mortgage co-signing from both hopeful recipients of the co-signing and those actually considering becoming a co-signor.
I find that there is often confusion surrounding this topic. (Some simply have co-signingconfused with co-borrowing. Two different things.) And many times, recipient and co-signor alike are unsure of the true benefits and responsibilities attached to the act of co-signing. (For a prior post on the topic of parents considering co-signing, click HERE.)
Co-signing is being considered in a growing number of scenarios. The situations I see as a Mortgage Lender most often surround hopeful Home Buyers with low *Credit Scores. Credit Scores so very low that the hopeful Buyers are unable to be approved for financing on their own merit. Or young Home Buyers that have not yet established enough credit history. (*Contact me for info on credit score guidelines/mortgage program availability.)
It’s quite common to hear my Mortgage applicants talk of their co-signor as something of a magician. When we speak during their initial mortgage consultation, they think the co-signor’s good credit is going to deliver a Mortgage Approval for them something like a magician delivers a rabbit out of a hat. “Wa-La!” We’re approved!
They believe that a willing co-signor with good credit will balance out their bad credit on their Mortgage Application.
Unfortunately, it doesn’t work like that when applying for Mortgage loans. Regardless of job history, income, or down payment ability, anyone and everyone applying for the Mortgage must credit qualify to be on that Mortgage. The rules are firm and clear on that.
So what does this mean to you as a Mortgage Applicant when this problem scenario arises? What options can you still consider should you hope to proceed with buying a home?
Much depends on your credit and financial situation. Options can exist though. One possible solution can be that your co-signor becomes the sole buyer of the home considered for purchase. Your co-signor seeks a mortgage on their own.
When your co-signor makes application for their mortgage, the property is then considered an “investment” property (when they are a non-occupant). As an investor seeking financing, they’ll be required to place a larger down payment on the purchase. In most cases, the down payment will be at least 15%. They’ll be required to qualify for a Mortgage on their own financial merits and credit scores. (Note: Interest Rates on investment property financing are typically higher than those for buyer-occupied properties.)
Should your co-signor agree to move ahead with this purchase/investment, you (the initial Buyer) become the renter. Most likely you’ll then pay the co-signor’s incurred mortgage payments via your rent payments to them each month.
What I’ve found is that many times written agreements are put into place between co-signor/investor and the initial Buyer during these types of scenarios. And often, the co-signor’s financing is viewed as only temporary while you, as the renter/initial Buyer, work on improving your credit scores.
When your credit is improved (or has grown) sufficiently to the point where you can successfully obtain your own mortgage, you then buy the home from the co-signing investor … or the investor and you Refinance the Mortgage into both of your names.
The bottomline is: No two purchase scenarios, co-signing, or financing scenarios are the same. Take the time to consult an experienced and knowledgeable Mortgage Lender regarding your buying and financing needs. Take this action well prior to starting your home search. That will allow you ample time to grow your credit history, correct, repair, or investigate all the financial options open to you for purchase.
Will Your Chicagoland Mortgage Co-Signor Deliver Magic? Scrambling to find a willing and capable co-signor after you have found the home of your dreams is extremely stressful. Don’t do that to yourself. Contact me now to discover all the buying and financing options available to you.