Co-Signing A Mortgage Loan: What Both Parties Need To Know

If you have less than ideal credit or simply want to get the best rate possible, adding a nonoccupant co-signer to your loan can help you qualify for financing. But the decision to co-sign on a loan or add a co-signer to your mortgage isn’t one you should make without knowing all the facts.

Today, we’re looking at what it means to be a nonoccupant co-client – or co-signer – on a mortgage loan. In this article, we’ll show you what co-signing a mortgage means and when it’s beneficial. We’ll also introduce you to the drawbacks of being a nonoccupant co-client and some of your other options as a borrower.

What Is A Co-Signer?

A co-signer is someone who agrees to take on the financial responsibility of the primary borrower’s loan if they can no longer make payments. Co-signers can be family members, friends, spouses or parents.

Co-signing on a loan isn’t just a character reference – it’s a legally binding contract. This means that when you’re a co-signer, the lender can come after you for payments if the primary signer defaults on the mortgage. The lender has the right to hold you responsible for the missed loan payment even if you don’t live in the home.

Why would you co-sign on a loan? People co-sign on loans to help family members or friends who want to take out a loan or refinance with bad credit. If your mortgage application is weak, getting a friend or family member to co-sign on the loan makes you a much more appealing candidate.

Co-Signer Vs. Co-Borrower: What’s The Difference?

Both co-signers and co-borrowers share in the responsibility of taking out a loan. You can also be a nonoccupant co-borrower, meaning you’ve agreed to take on responsibility for the payments on a mortgage even if you don’t live in the home. There is sometimes confusion on this point, but there really is no difference between being a co-signer and a co-borrower. The terms are synonymous from a lending perspective.

From a legal perspective, however, there’s a big difference: A co-borrower will appear on the property’s title, but a co-signer will not, in most cases. Being on the title comes with its own set of rights and responsibilities. For example, if the property falls into disrepair and a visitor to the home is injured as a result, you could be liable for damages if your name is on the title.

If you’ve been asked to co-sign a mortgage loan, ask your attorney how best to structure the transaction.

What Are The Benefits Of Having A Co-Signer On Your Mortgage?

Having a nonoccupant co-client on your loan can make it much easier to get a mortgage. Here are a few of the benefits that come along with applying for a mortgage with a nonoccupant co-client:

Potential For Better Loan Terms

• Looser credit score requirements: If you have bad credit, you may have trouble qualifying for a loan. However, a nonoccupant co-client with good credit on your loan may convince lenders to be more lenient with you.
• Assistance with employment requirements: Mortgage lenders need to see that you have reliable and steady income before they'll provide you a loan. If you happen to be self-employed or have a recent gap in your resume, a nonoccupant co-client with solid employment history can help you fulfill this requirement.

Improved Loan Eligibility

• The potential for a larger and cheaper loan: The lender considers both your and the nonoccupant co-client’s incomes when determining how much money you can receive in a loan. This can mean you could qualify for a larger loan with a lower interest rate.

What Are The Drawbacks Of Co-Signing A Mortgage Loan?

As the nonoccupant co-client, co-signing on a loan comes with several risks. Let’s review them.

Financial Liability For Co-Signer

• Potential responsibility for payments: If the primary occupant on the loan can’t come up with a monthly payment, you must pay it as the co-client. This premium will come out of your own pocket, and you can’t refuse a payment.
• Difficulty getting out of the loan: Once you co-sign on a mortgage loan, it’s very difficult to get out of it. Even if you fall out with the primary occupant, you’re still responsible for missed payments.
• A legal tie to the loan: Becoming a nonoccupant co-client means you’re just as legally responsible for the loan as the person living in the house. If you fall behind on coverage, the lender may sue you for legal fees and the remaining late mortgage payments.

Impact On Credit Scores

• Your credit may suffer: If the primary occupant misses a payment, your credit as the co-signer will suffer as well. It’s important that you’re aware of all the long-term negative consequences that could result from the occupying borrower’s default.

What A Co-Signer Is Responsible For

Before you agree to co-sign on a mortgage loan, it’s important to understand the legal and financial liability you’re assuming. As a co-signer, you’re agreeing to take responsibility for the loan if the primary borrower fails to make payments.

If the primary borrower misses multiple payments, you can easily become responsible for 100% of the loan value. Before co-signing, you should make sure that the primary occupant you’re vouching for has the means to pay the mortgage, insurance and maintenance fees for their new home. You should also ensure you have enough income to cover the payments if the homeowner defaults.

You can take a few additional steps to protect yourself against your primary occupant’s financial missteps. Let’s look at the steps you should take if you agree to become a nonoccupant co-client on a mortgage loan:

• Ask the primary occupant to give you online access to their mortgage statements.
• Ask the lender to send you a notification immediately when the primary occupant misses a payment.
• Set aside a monthly premium or two in your savings account in the event the primary occupant misses a payment.
• Keep the lines of communication open with the primary occupant. Encourage them to be open and honest if they think they might miss a payment.

Most importantly, you should only become a nonoccupant co-client for people you know are responsible. It’s best to never agree to co-sign on a loan for someone you just met or someone who might have a rocky financial situation.

Co-Signing A Mortgage Loan: A Look At The Process

Imagine you want to buy a home with a mortgage loan, but you have