Jan 2, 2018
by Hans Bruhner
My wife and I recently co-signed a mortgage for our daughter on her first home in Portland. We were happy to do it and I, in fact, suggested it myself with full knowledge of the pros and cons. This is a HUGE vote of confidence obviously but there are only 2 people on the planet I can see myself doing this for (I have 2 children).
Mortgage approvals are decided based on credit risk, collateral and debt ratios. Basically, up to 45% of your gross monthly income can go towards all your debt. If you do not have enough income to qualify then a co-signer can help.
The co-signer needs to have a low debt ratio or they are no help, period. If you have terrible credit, bringing on a co-signer will not help with that issue. A co-signer can also help with money for down payment and closing costs but without bringing debt ratios down to acceptable levels, cash alone is not enough. You simply look at all income of both parties and all debt of both parties and if we are within guidelines, then we are OK.
Some people are thinking that if the buyer who is going to live in the property doesn’t qualify then why would I sign up to help guarantee that mortgage? Great question and there are lots of situations that basically all boil down to the same answer. In my daughter’s case, she bought a 3 bedroom home and planned to rent 2 bedrooms which allows her to pay the balance of the mortgage no problem, when qualifying someone for a mortgage, we do not count room rents as viable income. Sometimes people have a spouse or partner who can’t be on the loan but they are contributing income to the household so the payments can be made but they don’t look good on paper.
I had a client who wanted his dad to co-sign and his dad was willing. He told me his dad made 20k a month and had a million dollars in the bank and excellent credit. All true but we had a little issue – dad had 15k a month in debt and that is 75% of his income so dad doesn’t help, he actually hurts us. He said his grandmother would help but she was on a fixed income. So I asked the obvious question – fixed at what amount? It turns out that it was fixed around $3,200/mo. And her house was paid off and she had no bills so it was basically like the client made an extra $3,000 a month and the deal worked.
The biggest cons are that the mortgage debt will show up on the co-signer’s credit and if a late payment is made it will show as well. The co-signer will have to explain this “extra” debt when they apply for a home or car loan and the only way to be removed from that loan is to pay it off. The lender will not remove the co-signer after a period of time. Lastly, the co-signer needs to jump through all the hoops to apply for the mortgage that the buyer does.
You can see why you need a deep bond with someone you are co-signing for and it should not be taken lightly. My daughter was 23 years old last year when she bought her first house and I believe it will help her build wealth and help her in life in a big way so my decision was easy.
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