What to know about cosigning a mortgage

Cosigning a mortgage is a financial responsibility with no tangible benefits for the cosigner. Still, you may decide that it’s right for you.

In 2021, 87% of homebuyers financed their purchase with the help of a home loan. But getting a mortgage can be difficult, especially if the borrower has a poor credit history or their mortgage application has been denied. If someone close to you is in this situation, they may ask you to cosign their mortgage.

Unfortunately, helping your loved one isn’t as simple as just signing on the dotted line.

What is a cosigner?

Lenders may require a borrower to obtain a cosigner if the borrower’s income or credit score is lower than needed to qualify for the home loan.

But cosigning is more than a vote of confidence for your friend or family member: It’s a legally binding contract. As a cosigner, you agree to take on the financial responsibility of the loan if the borrower is no longer able to make payments. If your loved one misses payments, you’ll end up footing the bill.

Is a cosigner the same thing as a co-borrower?

Not exactly. While both cosigners and co-borrowers share in a loan's financial liability, the duties and benefits are distributed differently. We broke down the differences below: 

What are the responsibilities of cosigners?

The primary responsibility of cosigners is to pay back the loan in full if the primary borrower cannot.

While it may seem like cosigners can sit back and relax so long as the primary borrower doesn’t default, cosigning a mortgage comes with a few additional burdens:

• Your credit score could be impacted by the borrower's late or delinquent payments.
• If you take over payments of the loan, you may also be responsible for paying late fees
• If the bank forecloses, the foreclosure will show up on your credit report.
• The debt may be factored into your debt-to-income ratio, an important indicator of financial health.
• All of these factors could affect your eligibility and interest rates on future loans.

Is cosigning a mortgage a good idea?

Helping a friend or family member achieve their dreams of homeownership is a priceless gift that comes with many intangible and emotional benefits. But cosigning a mortgage also comes with tangible responsibilities. Understand the costs of each before agreeing to cosign a mortgage.

Risks

• Financial liability for repaying the loan in full, without any benefits of owning the property
• Impact on credit score
• Impact on debt-to-income ratio
• Potentially lose a relationship if conversations about money turn sour

Benefits

• Helping a loved one achieve their dreams of homeownership
• Make a low-cost investment in your loved one’s path to wealth

How do you cosign a mortgage?

Cosigning a mortgage is similar to the process of applying for a mortgage. As a part of the borrower’s application, the cosigner will need to submit the following information to be verified by the mortgage underwriter:

• Income
• Assets
• Debts
• Employment records
• Credit score and credit history

Depending on the lender or loan terms, you may also need to verify your relationship to the borrower. Some lending programs require that the cosigner is related to the borrower in an effort to prevent investors from leveraging their power over homebuyers through the role of a cosigner.

What happens to the borrower if you don’t want to cosign?

Other options may be available for the borrower to secure financing for their dream home. Some of these services include:

• Government-backed loans: This category includes FHA and VA loans, which offer a lower threshold for borrowers' credit scores and down payments.
• State assistance programs: Like government-backed loans, these programs (like Arizona’s First Time Homebuyers Programs) lower the burden of entry for borrowers to purchase homes.
• Power buyer companies: Many power buyer companies, like Orchard, offer services that empower buyers to make cash offers on a home. The benefits of a non-contingent cash offer — like a faster closing process and fewer closing fees — can be a powerful bargaining chip to negotiate the sale price to something that wouldn’t require a cosigner.

Learn more about buying a home with Orchard.

Frequently asked questions (FAQs)

If you’ve decided the benefits of cosigning outweigh the risks, you might wonder if you’re eligible to cosign a mortgage. While the requirements will depend on the unique circumstances of the primary borrower and their chosen lender, here are some frequently asked questions to help you determine if you may be eligible:

Can I cosign a mortgage if I have one of my own?

Yes, but you’ll need to show the lender that you’re financially healthy enough to take on the burden of a cosigner. So long as you meet the credit score, debt-to-income ratio, and other lender requirements, you can cosign a mortgage even if you are the primary borrower on one.

What credit score is required to cosign a mortgage?

The minimum credit score will differ depending on the loan type and amount. But, generally, a cosigner will need good to exceptional credit: 670 or better. 

Can I be removed as the cosigner?

No. The only way for a cosigner to be removed from their obligations is for the primary borrower to pay off the loan in full or the primary borrower to refinance, which effectively replaces the original loan with a new one.

Can I become the primary borrower of a loan I cosigned?

No. The cosigner does not have any rights under the mortgage as a co-borrower does, nor are they able to assume rights during the loan’s lifespan.