Is blood thicker than water? How far would you go to help to help a family member buy their first home? What if that family member had a credit score that wasn't exactly perfect? That's the subject of a great new piece from Credit.com that explores that pros and cons of co-signing a mortgage.
If you've bought a home before, you know the critical nature of credit, and in particular, your credit score. It's the shorthand way that lenders can judge your ability to repay a loan, so having bad credit means lenders have to "price" more risk into the loan, typically in the form of higher interest rates. Even if you've been saving for a downpayment and have a steady income, a low credit score can jeopardize your ability to qualify at the lowest rate. For borrowers with challenged credit, having a co-signer can often be a last resort to help boost their chances. However, both parties should have a clear picture of what they are getting into. Co-Signing is the signing for another person's debt that involves a legal obligation made by another party to make payment on the other person's debt should be that person be unable to do so themselves.
Although the benefits of co-signing are pretty straightforward the risks are worth knowing:As a co-signer, you are just as responsible to repay the full amount borrowed as the primary borrower. If your friend defaults on the loan and can't repay, you will be responsible. In some states, lenders are even able to recover unpaid debt from a co-signer before attempting to collect from the primary borrower. Missed payments could translate into negative consequences to the cosigner's credit score.
One of the most important things to consider as a co-signer is your ability to borrow. Since future lenders will count both your debt and the debt you've co-signed for when determining your DTI (debt-to-income ratio), bumping your debt level up without a corresponding increase in income could make it tough to get the next car loan or mortgage.
Before jumping into a co-signing arrangement, experts interviewed by Credit.com suggests affordable options like Federal Housing Administration (FHA) loans, which allow for lower credit scores and down payments.