If you are having trouble getting a mortgage your broker might press you to get someone to cosign a loan to make the deal happen. Even though it might sound like a great idea….please slow down.
There are risks to both you and your cosigner if anything goes wrong with your mortgage. Here are the top 4 potential problems:
1. It will enable you to purchase a home you may not be able to afford
The whole purpose of having a cosigner on a mortgage is to enable you to get a mortgage you cannot qualify for on your own. That may sound good….but it could end up being a big problem.
The cosigner allows you to take a larger mortgage than you could afford on your own. In most cases, the cosigner’s involvement in the mortgage ends at the closing table. You are the one who will make the payments. Can you really afford those monthly bills? What happens if you lose your job or incur some other unexpected expense. How will that impact your ability to make your payments?
2. The cosigner is tied to your mortgage for as long as it lasts
The cosigner will remain on your mortgage for as long as the loan is outstanding. It does not matter that he or she will not be participating in the monthly payments. If you have a problem with the payments that’s going to hurt the person’s credit report. Do you really want to take responsibility for that?
Let’s take the above concept a step farther. Your cosigner is not just on the mortgage for credit qualification purposes – he is, first and foremost, the guarantor of that mortgage. Should you default on the mortgage, the mortgage lender will come after your cosigner to make good on the unpaid obligation.
If you file for bankruptcy or foreclosure it can spill over to your cosigners credit too. A foreclosure will appear on your cosigners credit report, and so will a bankruptcy if the house is included in the filing.
The mortgage lender can then go after your cosigner for any deficiency in the mortgage balance. Your cosigner’s credit will be negatively affected for many years.
This is the dark side of cosigning a mortgage that is rarely discussed at the time that it is happening.
3. The cosigner’s finances will be limited by your mortgage
Let’s forget about late payments and defaults. Even if you make your payments on time faithfully every month, and never default on your loan, the mortgage will still have an effect on the cosigners credit.
Since the cosigned mortgage will appear on the cosigners credit report, it may limit the cosigners ability to get credit in other situations. Mortgage companies often allow a cosigned mortgage to be excluded from the cosigners credit upon the presentation of evidence that you – and not the cosigner – have made the monthly payments for at least the past 12 months.
But not all lenders follow this practice, and it can sometimes be difficult to fully document that you have made all payments. For example, if you can only supply evidence that you made 10 out of 12 payments, the new mortgage company may still count the cosigned mortgage debt – your mortgage – against your cosigners credit.
4. Financial problems can turn into family problems
There is one more negative to having a cosigned mortgage. In the event of any the above happen, and the mortgage somehow limits or impairs the cosigners credit going forward, it can result in family problems.
This is why the saying, “never do business with family and friends” comes up so often. Even without costing the cosigner any money at all, you can impair or limit the cosigners ability to borrow money. And if a mortgage lender goes after the cosigner in the event of your default on the mortgage, your cosigner can turn a very angry person.
As convenient as it can seem to have a cosigner help you qualify for your mortgage, think long and hard about it first. There are more risks involved than most people are aware of. If you do and those risk factors turns into a problem, you could be facing a bigger fallout than you ever imagined.
Have you ever seen a cosigned mortgage that didn’t have a happy ending? Did you ever consider asking someone to cosign your loan after you got turned down for a mortgage?