Premiere Plus Realty Co.
Jonathan Maines, Premiere Plus Realty Co.Phone: (239) 682-2019
Email: [email protected]

Are You Prepared to Cosign on a Home Loan?

by Jonathan Maines 06/28/2020

Image by Gerd Altmann from Pixabay

Should you cosign on a mortgage loan to help someone else buy a house? 

Hopeful home buyers who lack the necessary credit history, W-2 income or overall income versus their debt can face problems getting a mortgage lender to approve a loan. Borrowers with a 43% or higher debt-to-income ratio may learn their income doesn't suffice. Yet if a cosigner steps up, promising to pay the mortgage if needed, the loan might be approved.

If you are the one who steps in, it's highly likely that your name will actually be on the title. Most lenders want it that way, so the asset can be pledged as collateral by both of you.

Are You Prepared to Do More Than Simply Cosign the Loan? Should You?

So, if the mortgage company asks you to serve as a co-borrower, not just a cosigner, understand the lender's expectations. Does the lender expect you to become a co-owner? If so, your name will appear, along with the primary borrower's, on the deed — even if you never set foot in the house and don't expect to pay anything.

If the person you are helping ever gets in a bind and can't make a mortgage payment, you'll be second in line to pay. And your credit report will be dented if you don't.

Were you a mere cosigner, you'd be asked to pay the debt but never have a claim to the value of the home. In other words, mere cosigners get liability for the debt — without the asset. 

What Does a Good Outcome Look Like?

Of course, you want the person you're helping to enjoy living in the home, to pay the monthly mortgage and, ultimately, to apply for a new loan that refinances the debt and turns the primary borrower into the sole borrower and the sole owner.

Even if you are 100% sure all will go as planned, it's a good idea to have a lawyer draw up a binding agreement that memorializes the primary borrower's intent to let you off the title, deed, mortgage and homeowner's insurance policy by a date certain after closing on the home. It will keep the primary borrower focused on making regular mortgage payments and developing strong credit, anticipating the refinancing application process. 

When the primary buyer successfully refinances the home mortgage, it will be time for you to take your name off the title. You can sign a quitclaim deed to release yourself from ownership.

Then you can congratulate yourself for enabling someone to buy a home. And congratulate the new homeowner for keeping both of your credit ratings as strong as your relationship.

About the Author
Author

Jonathan Maines

After graduating from the University of Wisconsin- Eau Claire, Jon moved to Naples, Florida in 1989 where he took a job with the Naples Police Department. In 1991 Jon married his wife Kathy, also from Wisconsin, and had two children. During the next 19 years Jon continued to work for the Naples Police Department ultimately becoming a Lieutenant. During this time he and Kathy also became successful real estate investors. In June 2010 Jon retired from the Naples Police Department to focus his energies into being a successful Real Estate Professional. Jon believes that his faith, honesty, integrity, knowledge and hard work have been the key principals to his success in the Real Estate Business. If you are looking for an agent you can count on and trust to give you an honest perspective when looking to buy or sell your home, Jon is here to serve you. Call today for a free market analysis!