Beyond the Signature – What Realtors Must Know About Cosigning

The financial strength of your buyers’ co-signer matters – it is not enough that they simply have one.

The credit, income, assets and liabilities of the co-signer will be evaluated the same as the main borrower.

The use of a co-signer can limit the type of property your buyer may purchase. While cosigners can greatly increase approval chances for a buyer, they can also present additional challenges especially if that co-signer already owns a house, lives far from the subject property, or hasincome, credit and documentation challenges of their own.

Yes, cosigners can enhance a borrowers chances of loan approval, especially in cases of limited credit history and the inability to meet the income or debt requirements on your own.

A word of caution, however – using a co-signer does cut both ways.

Lenders evaluate the blended debt-to-income ratios of the buyer and cosigner. So, if your borrower’s co-signer has a lower score than the buyer, then the co-signer’s score is used to determine the loan product, interest rate and loan terms available to the buyer. If the co-signer’s debt needs to be paid in order to get the blended ratios in line, then there is a real risk the co-signer will withdraw from the transaction if paying the debt is something they are unable or unwilling to do. (For example, a student loan debt that the co-signer is in the process of getting forgiven; or a car loan they had no intention of paying off) .

Shared responsibility considerations should not be overlooked.

With a cosigner, both the borrower and the cosigner share responsibility for the loan. If the borrower encounters difficulties making payments, the lender can hold both parties equally accountable for the loan repayment. Be sure your buyer has that conversation with a co-signer up front. Many a deal falls apart when the co-signer learns through the loan disclosures that they may be held accountable should the buyer be unable to pay.

Co-ownership Considerations: If the cosigner is also a co-borrower, they will have an ownership interest in the property. This may impact decisions related to property management, refinancing, or selling the property in the future. (See our article explaining the difference here).

We’ll get to the rest in the upcoming article. In the meantime, let us know what you think by posting your comments here. We would love to know what topics you would be interested in reading about. Email us or schedule an appointment to speak to a loan officer.

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