Want to be 100% responsible for someone else’s obligation? Cosign their mortgage, and you’ll be just as responsible for repaying the loan as they are! That’s true even if you’re cosigning simply to help them qualify for the loan.
Before you take the plunge on cosigning for a house, make sure you know exactly what that means. You are, in essence, lending a portion of your future income and creditworthiness for the benefit of someone else’s obligation. Consider these five questions about cosigning to learn more about your responsibilities. Then, decide for yourself if this is a step you want to take.
1. What Is a Cosigner?
A cosigner is someone who is as responsible for a debt as the other party. Often, parents consider cosigning loans for their children to help them buy their first home or other large purchase.
There are a lot of reasons why someone might need a cosigner. Most often, it is because they do not have either the necessary income or the appropriate credit history. Regardless of the situation, the person needs someone else to sign on the loan because the lender doesn’t see them as a safe risk. Which means you, the potential cosigner, need to really consider whether you see the person as a good risk. Do you believe they will honor their obligations? Are you willing to be responsible if they do not?
2. What Does Cosigning Do to Your Credit?
When you cosign, you’re taking a risk. You’re investing your good credit name in someone else, and investments can mean losses. For a cosigner, the loss can be credit related.
The mortgage will show up on your credit report as well as the report of the other party. That could mean good news in the long run if the other person makes timely payments. You’ll get the credit boost from that. A mortgage could also diversify your account mix and give your score a boost.
However, in the short-term, you’ve got a large credit account on your report. If you want to apply for your own loan at anytime, this cosigned mortgage could count as debt. That could increase your debt-to-income ratio, making it harder for you to get your own loan.
And if the person doesn’t pay the mortgage in a timely manner, your credit could take a hit. Late payments can drive your credit score down—even if they’re on a loan you only cosigned for.
Finances are often a touchy subject, but if you’re cosigning a loan you will need to be comfortable talking about it. Their actions will affect you, and you need to have transparency into the accounts you’re responsible for. Sign up for a free Credit Report Card from Credit.com to keep tabs on your credit score so you can address any issues quickly.
3. Can a Cosigner Be Removed from a Home Loan?
When you cosign for a loan, you’re agreeing to be 100% responsible for payments on the loan. Most creditors won’t let you off the hook for that obligation after the fact.
However, there are a few ways you can get your name off a home loan after cosigning. First, you can check to see if the loan documents included a cosigner release option. This is an option that states the creditor will remove the cosigner if the other person meets certain requirements, such as an improved credit score.
These options aren’t common, however. In most cases, the only way to get out of a cosigned loan is to have the other person refinance. If they have improved their financial situation, they may be able to refinance their home loan without your help.
4. Can a Cosigner for a House be Sued?
Yes, a cosigner can be sued if the mortgage payments are not made after a certain amount of time. You might also deal with collections calls and notices. The lender had you cosign for a reason—it believed you were capable of making good on the loan if the other person defaulted. That means the bank will look to you for its money if necessary.
5. Does a Cosigner Need to Worry about Taxes?
Cosigning the mortgage and ownership of the home aren’t exactly the same thing, so you won’t get any tax advantages—but you also do not need to worry about issues such as property taxes. Even if the debt is forgiven or written off, cosigners should not have to worry about the dreaded 1099-C. The IRS considers forgiven debt to be income, but in this situation a cosigner is considered a guarantor, rather than a debtor, and should not report forgiven debt as income on their taxes.
Options for Helping Without Being Responsible for a Mortgage
There are ways you can help someone get a mortgage without cosigning for them. First, you might offer to lend them the money for a down payment. In some cases, a sizeable down payment can help bring a mortgage loan into the realm of possibility for someone with less-than-stellar credit.
You can also help someone understand their options so they can make the best decision when signing for their own mortgage. Start by comparing mortgage rates so they can understand exactly how much home buying power they wield.