5 Mortgage Questions Co-Signers Need to Ask (VIDEO)
Typically regarded as a rite of passage when growing up, purchasing a home is a major life decision and one that should not be taken lightly. After all, mortgage payments can last for decades and can be very, very expensive to exit once the dotted line is signed. All of these complications are compounded by the addition of another party to the loan, also known as a co-signer. For a variety of reasons, borrowers might need a co-signer to help them get the loan; however, there are many things a potential co-signer should consider prior to agreeing to this.
In this article, we will review some of the reasons why a co-signer might be needed for a mortgage loan as well as five important questions that you should ask yourself if you are considering co-signing a loan for someone.
Understanding the Risks and Responsibilities of Co-Signing a Home Loan
Why would someone need a co-signer for a home loan? Often it is due to issues with credit and past payment history, but it can also be due to a lack of enough of a down payment or even insufficient credit history. In the first case, the co-signer does have a lot of things to take into account before signing any agreement.
If past performance is an indicator of future behavior, then this borrower might just default on the loan and leave the co-signer in the lurch. Then again, if the current credit status is not due to mismanagement of finances but rather something else, then a co-signer might be more apt to sign a mortgage loan.
Each situation is unique but, more often than not, co-signers are required when there is either poor credit or insufficient income to satisfy loan requirements – two major red flags for any co-signer to consider. Aside from that, we have broken it all down into five major questions that co-signers should ask themselves first:
1. Why Doesn’t the Borrower Qualify?
This is the single biggest consideration you will need to make and that’s why we list it first. Why doesn’t the borrower qualify on their own?
The answer to this question will help illuminate your thinking on all of the other questions on this list. Having all of the knowledge you need at your disposal to make a decision is just one step. The second step is actually going out and considering everything in detail. This might involve some difficult conversations with the borrower about their credit history.
Co-signing a Mortgage – Video
Further, you might even want to see proof of redressing past wrongs in the credit department as well as a current credit report. The reason why you need to know the borrower’s history is that you are now assuming the cost of any failure. Treat co-signing a loan the same way you would as a loan for yourself and then some.
You need to dot all of your I’s and cross all of your t’s when it comes to this kind of partnership. And this typically involves an overload of information and a lot of contemplation.
2. How Will This Impact My Credit?
In the worst-case scenario, you will be stuck paying the loan back. But even if that doesn’t come to pass, you will still have to carry the loan on your credit report. This will impact how much money you are able to borrow for other things.
For example, if you want to borrow money for a home or even refinance a mortgage, this process will be complicated by the fact that you have your signature on another loan. This is why it is so important that you not only think about the present situation but also about the future. Do you see yourself needing credit in the future? Then you might want to hold off on co-signing a loan. Tying up your own credit to help someone else realize their dreams.
3. How Will This Impact My Cash Flow?
Beyond credit, you want to consider how it will impact your cash flow overall. Even if you are not making the payments on a loan, you could still be called upon to do so at any time. What would that financial scenario look like? As we outlined above, what if you need a loan for home improvement purposes or a car? You might be forced to pony up more cash upfront on future deals if you co-sign for a loan now.
If you don’t envision any major expenses in the future or don’t think you’ll make any major purchases. This probably isn’t the biggest consideration. But being told that you need to put down a bigger payment for a car in order to make a loan happen is just one of the many ways that co-signing a loan can actually cost you money without even involving the loan itself.
4. Can the Borrower Afford the Loan?
Why is the borrower taking out this loan? Aside from considerations of credit history, is the person in question taking on more than a loan necessary? This is the perfect recipe for financial disaster and requires you to probe and find out what is going on with the loan.
After all, do you want to finance someone’s extravagance? Probably not. But you do want to help someone out – that’s why you’re co-signing the loan. Determining the scope of the loan will help you figure this part out. As will as help you avoid an embarrassing situation where someone is using your good credit to live beyond their means.
5. What are the Loan Terms?
If you are going to co-sign a mortgage loan, you need to review the terms of the loan very carefully. From how long it will take to pay back the interest rates and fees. This due diligence on your part will help assess whether or not you are capable of co-signing the loan.
We recommend you sit down with a financial advisor to talk through the ins and outs of the process as well as any potential disadvantages unique to your financial situation.