Mortgage 101: The Dos And Don’ts Of Choosing A Cosigner
What You Need to Know Before Selecting a Cosigner for Your Home Loan
Gone are the days when mortgage lenders approved practically every application that rolled across their desks. Ever since the housing bubble burst, getting approved for a mortgage has become increasingly difficult. For a while, even buyers with good credit couldn’t get approved. Thankfully, things are finally starting to loosen up, but it’s still hard for an individual with average credit to get approved for the mortgage they want. For these buyers, a cosigner may be able to help get their loan application approved. But is using a cosigner a good idea? For some, it is; for others, not so much. Here are the do’s and don’ts of selecting a cosigner.
How Can I Tell if I Need a Cosigner?
In most cases, although the lending agent will let you know if your loan won’t be approved unless you have a cosigner, you can actually determine it on your own well before you apply for your loan. For instance, if you are applying for credit, there is a good chance a cosigner may be required if:
- Your credit isn’t strong enough to qualify on its own
- You have no established credit
- Your income doesn’t meet the lender’s minimum requirements
- Your income does meet the lender’s minimum requirements, but you have a high debt-to-credit ratio
- You recently changed jobs
- Your income varies from month to month
- You’re self-employed
Who Shouldn’t You Ask to Cosign Your Mortgage Loan?
If you are determined to buy a home regardless of your credit or income status, you might be tempted to accept any cosign offer that comes your way. It is worth pausing and taking a minute to think carefully about your options, though, to make sure you won’t be signing with any of the following:
- Trust plays a major role in choosing a cosigner. A home mortgage is a big responsibility, so it is of the utmost importance that you can trust the person who is cosigning for your loan. Seeing as your cosigner is equally responsible for repayment of the loan, if you don’t trust the individual (or if they don’t trust you), then you’re making a mistake that could potentially come back to bite you.
- A distant relative. Unless you have regular contact with a relative, asking them to cosign your loan is probably going to be a mistake. Even if you have a wealthy uncle, it isn’t a good idea to ask him to cosign your loan if you don’t have regular, ongoing communication with him, regardless of whether or not he has a perfect credit score and millions of dollars in the bank. Plus, it goes without saying, but asking for such a commitment from someone you haven’t spoken to in years could come across as presumptuous, entitled, and rude.
- Someone you don’t want to share financial information with. Because cosigning a loan makes the cosigner just as responsible for paying it back as you are, you can expect the person you ask to want to have an idea of your financial stability before agreeing to sign with you. Feeling uncomfortable about disclosing your financial information to your potential cosigner is a sure sign that they shouldn’t be signing with you in the first place.
Who Should You Turn To?
Most people in need of cosigners tend to turn to their parents first. Your parents know more about you than just about anybody else — they have an idea of how well you handle your finances, how long you have been at your job, how much you earn, and other important factors a cosigner needs to consider before agreeing. Most people trust their parents, and asking them to cosign is a natural solution. Even if it turns out that your parents don’t have the credit strength to be able to sign themselves, they may have ideas as to other family members who might be able to help, and they can vouch for you. Some other ideas for cosigners include siblings and close friends.
Before Choosing a Cosigner, Consider Your Ability to Pay
If you are not 100% sure that you are going to be able to comfortably handle your loan payments then you are putting your cosigner’s financial health in jeopardy, as they are legally responsible for paying your loan if you are unable to. Therefore, if you feel at all apprehensive about your ability to pay your mortgage, it is critical that you think about alternatives to cosigning, such as waiting and working to improve your credit so you can get approved on your own merit. That being said, if you are responsible and prepared going into your agreement, than cosigning can be a fantastic way to buy your dream home.
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