How Does a Cosigner Work on a Mortgage? Pros, Cons & FAQs
If you’re having trouble getting approval from the bank for a mortgage or can’t seem to get the interest rate you want, a cosigner might be just what you need. But what exactly is a cosigner, and how does it work when you’re trying to get a mortgage? It basically works by making the cosigner responsible if the original signer of the loan doesn’t pay it back.
It’s a lot to sift through, and it has major implications, so we recommend taking the time to read through everything here to get familiar with everything you need to know.
Whether you choose to cosign someone else’s loan, need someone to cosign yours, or you’re just looking into it, there are a lot of things you need to think about.
How Does It Work?
If you’re trying to purchase a home, car, or take out another type of loan but the bank doesn’t want to give you the money because of bad credit, lower income, or other mitigating factors, a cosigner might be what you need.
A cosigner works by making the cosigner responsible for the remaining balance on the loan if the original signer of the loan doesn’t pay it back. The loanee is essentially using someone else’s credibility to secure a loan since the bank doesn’t fully trust them with that particular loan.
The cosigner gets no assets out of the deal, but if the original loanee doesn’t make the payments, they legally have to make those payments or the bank can come after their assets too.
What Are the Different Types of Cosigners?
While there is only one way to cosign a loan, something that many people get confused over is the difference between a cosigner and a co-borrower. The difference between the two terms all comes down to who owns the asset.
With a cosigner, the original borrower owns the asset completely. They don’t have to make any payments unless the original borrower starts to miss payments, but they also don’t have any control over the asset.
With a co-borrower, the co-borrower has joint ownership of the asset. However, a co-borrower shares all responsibilities of the loan, including repayment. But if one person wants to sell the asset, they’ll need the approval of both co-borrowers.
A co-borrower isn’t a cosigner though, and most commonly, co-borrowers are spouses or significant others who live with the original borrower.
Where Is It Used?
You will most typically find people cosigning loans for larger assets like homes and automobiles. When someone cosigns a loan, it’s either to get the original applicant approved or to get them a lower interest rate because they’re relying on someone else’s better credit or higher income.
Typically, the original buyer will have something keeping the bank from giving them the loan at the interest rate they want and a friend or family member will step in and put their credit and name on the line to make the payments if the original borrower doesn’t make the monthly payments on time.
Advantages of a Cosigner
Having a cosigner gives the original borrower a slew of advantages. First, it often opens the borrower to higher credit levels they wouldn’t be able to access otherwise. Furthermore, if the bank will only give a borrower a higher interest rate, a cosigner can often help with that.
Cosigners are especially relevant when someone has a limited income history or limited credit. It’s not that these people aren’t trustworthy, but the bank wants to see a positive history before giving them a larger line of credit.
If the person has a reliable family member or friend, they can build their credit while paying back the loan, bypassing the time
it takes to build their credit up in other ways.
Disadvantages of a Cosigner
The disadvantage of a cosigner all falls on the cosigner. First, they don’t get any ownership stake in the asset. They take on the liability if the original borrower fails to make the monthly payments, but they don’t get any ownership.
Not only that, but the cosigner also has the loan amount tied to their credit. That means if they’re looking to take out another loan for themselves, they might not be able to get approved for the amount they want.
Frequently Asked Questions (FAQs)
If you’re looking to cosign a loan or to get someone to cosign a loan for you, it’s completely normal to have a few questions. We understand, and it’s why we decided to answer some of the most frequently asked questions for you here:
Does Having a Cosigner Help With a Mortgage?
Having the right cosigner can absolutely help you get a mortgage. Having a cosigner lets the bank use both of your credit histories, adding their income to the affordability calculations.
How Long Does a Cosigner Stay on a Mortgage?
It really depends on the terms of the loan. Sometimes cosigners will stay on the loan for 2 years, and other times, the cosigner will stay on the loan for the entirety of the loan. Check the fine print on any loan you’re considering cosigning for more details.
Do Cosigners Own the House?
No. Cosigners do not have any ownership stake in the home. Cosigners only take on financial responsibility for the home if the original borrower starts to miss payments or doesn’t make payments on time.
Can You Be Removed as a Cosigner?
Once again, this depends on the terms of the loan. If you’re a cosigner on a loan and don’t want to be anymore, we recommend reaching out to the financial institution to see what options you have.
Do FHA Loans Allow Cosigners?
Yes! FHA loans are for first-time home buyers, and often, first-time home buyers have a limited credit history. By using a cosigner many buyers can purchase their first home using an FHA loan.
A Quick Reference Guide
If you need someone to cosign a loan to get a mortgage, it’s not the end of the world, but finding someone willing to take on the financial responsibility might be a bit more challenging.
But knowing what exactly a cosigner is and the implications for both the borrower and the cosigner is the first step in making an informed decision that’s best for everyone!
Featured Image Credit: Yuriy K, Shutterstock