You just did a good thing. You agreed to co-sign on a mortgage. Especially for first time homebuyers, qualifying on their own can sometimes be a challenge, especially for those who are having difficulty qualifying due to debt-to-income ratios, coming up with funds for a down payment, having some credit issues or having their very first job right out of school.
Co-Signing to Help a Friend of Family Member
There are indeed issues that buyers need to address. And when someone does indeed need some help, deciding to co-sign on a mortgage can be a real gift. If this is you, or just thinking about it, there are some things you need to know before you put your name on the dotted line…for someone else’s house.
For first time buyers getting someone to co-sign on a mortgage can be the one thing that gets them into their first home. For whatever reason. Yet deciding to co-sign on a mortgage has other impacts other than helping someone out. What are the things to know if you’ve agreed to co-sign?
Co-Signing and Credit Reports
First, when you co-sign on a mortgage, you’re allowing someone else’s credit payments appear on their very own credit report. If someone continues to make monthly payments on time, it can help your credit scores as well because the solid payment history will appear on your report, boosting your own scores. However, if a late payment shows up, it hits your credit report as well. Note, a late payment as it relates to credit scores means a payment made more than 30 days past the due date. A payment that is made on the 10th of the month when the due date was on the 1st won’t have an impact. The only impact of a payment made later in the month when actually due on the 1st means a late payment fee.
At the same time, if a late payment is made, you may not be aware of it until you check your own credit report. And if/when it does, your scores will falter. Not by much initially but if subsequent late payments begin to appear, your scores will be negatively affected. This could mean a surprise if you apply for an auto loan and you’re looking at higher interest rates that you didn’t expect.
Instead of that zero-percent financing you expected, quoted rates might flirt in the 7.00% or higher. You might even be asked to make a larger down payment than originally expected. If the payment is late on an account, you can expect to be asked to make the late payment on the original borrower’s account. Something you might not expect. So, what to do?
Employment and Household Finances
First, ask for a copy of the applicant’s credit report before making any commitment. If there are late payment patterns showing up, you might want to reconsider co-signing on anything. If the credit report is clean, you might want to move forward to help the applicants qualify. Second, ask about the current employment status. It’s not automatically a bad thing if someone doesn’t have a current job but if not, that can alert you whether or not someone will be able to pay their bills on time.
Another side note, the ‘bills’ don’t include things such as utility or cable bills, but credit accounts that would appear on a credit report such as a car or student loans. In such an instance, the prospective borrowers could then use loans that allow ‘alternative’ credit that include payments to utility companies and student loans. Again, not a bad thing but in this instance, you can also ask for payment histories for these alternative credit accounts as well.
It’s always good to help people out, especially your kids or relatives who are just starting out on their credit plans, just know the payments histories of those you’re helping will show up on your report. Most usually it’s okay, but sometimes it’s not. If you’re not sure, give us a call. We can help.