Does Co-Signing a Mortgage Affect a First-Time Home Buyer?

You haven’t bought your own house yet, but you’re being asked to co-sign a mortgage for someone else. Does co-signing affect a first-time home buyer?

What will it mean for your first home?

Co-signing is one of the least well-understood concepts in the mortgage world. In short, co-signing doesn’t impact your long-term chances of getting a mortgage—but it could still have some significant consequences for you.

Does Co-Signing Affect a First-Time Home Buyer?

Co-signing on a mortgage is when you agree to be equally responsible for repaying the loan, even though you’re not the primary borrower. It’s generally used to help someone with bad credit get approved for a loan. Your good credit will offset your bad credit.

In the short term, co-signing can help you build your credit. If the primary borrower makes their payments on time, the co-signers credit will also improve.

However, co-signing comes with a lot of risks. You’re essentially putting your financial future on the line for someone else. If they miss a payment, it will damage your credit. And if they can’t afford the loan and default, you’ll be on the hook for the entire amount.

What’s the Difference Between Co-Signing and Co-Borrowing?

Before we go further, you must understand the difference between co-signing and co-borrowing. 

When you co-sign a loan, you’re just vouching for another person. You’re not putting any money towards the loan yourself.

When co-borrowing, you’re both taking out the loan together. You’ll both have your names on the loan and be equally responsible for making the payments.

Co-borrowing can be a good option if you’re buying a house with someone else, like a family member. You’ll both be invested in the property and have an incentive to make sure the mortgage is paid off.

Comparatively, co-signing is riskier.

Can You Get a House After Co-Signing for a Mortgage?

Co-signing a mortgage shouldn’t directly impact your ability to get a mortgage. However, there are indirect ways that it could affect you.

For example, co-signing a mortgage and the primary borrower defaults will damage your credit score. This could make it harder for you to get approved for a mortgage in the future.

It’s also important to remember that you’re equally responsible for the loan if you co-sign. This means that the debt will show up on your credit report. If you’re trying to get a mortgage, lenders will take your debt-to-income ratio into account… for at least the first twelve months.

After twelve months, though, it is generally assumed that the primary borrower pays their debts on time.

How Does Co-Signing a Mortgage Impact Your Credit?

Whatever the primary borrower does regarding the mortgage will impact you for better or worse. If they pay their mortgage on time, then their credit will improve. But if they pay their mortgage late, their credit will dive.

And, if the primary borrower goes into foreclosure, the co-signer will be held liable. The lender could come after you for the rest of the mortgage payments. They could also sue you and try to collect your money through other legal means.

Can You Still Get an FHA Loan If You’re a Co-Signer?

You can still get an FHA loan if you’re a co-signer. However, there are some restrictions.

The primary borrower must have established residency in the property for at least twelve months before the co-signer can apply for an FHA loan. This is to ensure that the co-signer lives on the property.

The co-signer must also go through the standard credit and income verification process to ensure they can afford the loan.

Do All Mortgages Allow a Co-Signer?

No, not all mortgages allow a co-signer. Some lenders will require that the primary borrower has a certain credit score or income level before allowing a co-signer.

Other lenders don’t allow co-signers at all. It’s always best to check with the lender beforehand to see if they have co-signer restrictions.

For instance, a co-signer on a VA loan must be a co-inhabitant; they must live in the property with you. But that’s not true for a co-signer on a conventional or FHA mortgage.

Can a Co-Signer Be Removed from a Mortgage?

Removing a co-signer from a mortgage is possible, but it’s not always easy.

The primary borrower will need to refinance the loan in their name. They will need to have good credit, but presumably, they didn’t have good credit when they first acquired the loan.

If you’re the co-signer, you might be able to have your name removed if the primary borrower refinances the loan. Or, if the primary borrower sells the property, you might be released from the mortgage agreement.

Some mortgage lenders may also have additional requirements regarding removing a primary borrower.

Can You Co-Sign a Mortgage If You Already Have One?

Yes, you can co-sign a mortgage even if you already have one. However, it’s important to remember that you’re still responsible for both loans. This means that you must be very careful about how much debt you take on.

It’s also worth noting that some lenders might not be willing to lend to you if you already have a mortgage. They may view you as too much of a risk.

Co-signers still have debt-to-income ratios to meet. This is why a co-signer frequently doesn’t have a mortgage or has already paid off their house. You probably won’t qualify as a co-signer if you have a hefty car loan and credit card debt.

Should You Co-Sign a Mortgage?

Sometimes, someone you might love might not be able to buy a house they need if they don’t have a co-signer. 

But there are other times when they might want a co-signer because of a better mortgage rate. 

You need to balance their needs with your potential risk.

As a co-signer, you will become completely responsible for the mortgage payment if the primary borrower defaults. You must pay the mortgage lender if the primary does not or may be impacted by foreclosure.

You should only become a co-signer or co-borrower if you believe you can pay off the monthly payment, and to do otherwise would put the mortgage approval at risk. Otherwise, there are often other options for a home loan.

Conclusion: No, But You May Need to Wait 12 Months to Get Your Own Home

Co-signing a mortgage won’t directly impact your ability to get a mortgage in the future, at least after the first 12 months of on-time payments. However, it could still indirectly impact you in several ways.

Consider the risks before you agree to co-sign for someone else. You should never co-sign a mortgage loan for someone you aren’t close to.

Your biggest risk is that co-signing a mortgage could damage your credit or lead to creditors coming after you. With all the risks this entails, you are promising to take on a loan on behalf of another person.

  • Co-signing a loan won’t directly affect your ability to purchase a first home.
  • However, you must wait at least 12 months for a mortgage loan.
  • Still, co-signing can be risky for various credit and financial reasons.

FAQs

Does co-signing affect first-time home buyers?

Co-signing should not directly impact your ability to buy a first home. However, there are indirect risks to cosigning, such as the potential for damaging your credit score or being held liable if the primary borrower defaults. You should always weigh these risks before agreeing to cosign for someone else.

Does co-signing a house affect your ability to borrow?

Yes, co-signing can affect your ability to borrow in the future. If you cosign a mortgage and the primary borrower defaults, it will damage your credit score. This could make it harder for you to get approved for a loan in the future. But it doesn’t stop you from getting a mortgage.

Can a first-time homebuyer have a co-borrower?

Yes, a first-time homebuyer can have a co-borrower. A lender could require it if you have limited credit or income. Having a co-borrower can help you qualify for a loan that you might not otherwise be able to get. Just be sure you understand the risks before agreeing to co-sign for someone else.

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