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How Mortgage Co-signing Works


Pros and Cons of Co-signing a Mortgage

As we discovered earlier, there are mixed opinions on the concept of mortgage co-signing. Although there are advantages -- mostly to the primary borrower -- of co-signing, things can go wrong and create more than an inconvenience for either or both people. Weighing the pros and cons of co-signing before you ever put your signature on that first mortgage document will help you make the best decision for your lifestyle and financial future.

There are a number of scenarios where a person would need or want a co-signer. Understandably, a married couple would typically co-sign for a mortgage. But there are other situations where a borrower must seek a co-signer. He or she may have weak credit, a high debt-to-income (DTI) ratio or an unstable job history. For example, a primary borrower may have been divorced for a number of years, but his name is still on the mortgage of the house in which his ex-wife lives. Or, it may be someone who filed bankruptcy several years ago due to a financial catastrophe and is now getting back on his feet. A bank might require a primary borrower to have a second borrower who's able and committed to guaranteeing the loan will be repaid. There are also some personal motives a person may have for wanting to back up another person's promise to pay a mortgage -- and most of them have to do with helping a friend or family member.

However, there are reasons to be cautious about co-signing a mortgage, even if you're trying to lend a hand to a sibling or a pal. Even the best-laid plans can go wrong and wreak havoc on one or both borrowers. Suppose the primary borrower makes all the mortgage, tax and insurance payments, as well as pays all maintenance costs for years. Then, all of a sudden, the co-signer pops up and wants to kick the borrower out of the place, demands 50 percent of the value of the home, or unbeknownst to the primary borrower, uses the property as collateral for another loan. These are worst-case scenarios for the primary borrower. Usually, those opposing the idea of co-signing advise people against doing so because of what can go wrong for the co-signer. For example, if the primary borrower fails to make payments or makes them late, it goes against the secondary borrower's credit history as well. In addition, the mortgage will be factored into the secondary borrower's DTI ratio and may prevent him or her from buying other property or getting other loans.

It's not easy for either party to get out of a co-signed mortgage. They have to sell the property and pay it off, or one could refinance the mortgage without the co-signer. Perhaps the least preferred way of getting out of the mortgage is if one or both of them dies, in which case their estates are responsible for it.

As you can see, co-signing is a more complicated version of getting a mortgage; more parties are involved in the loan agreement and with the care and maintenance of the property. Anyone considering mortgage co-signing should consult with both an attorney and a title company to get a complete understanding of the rights, responsibilities and potential pitfalls of being a co-signer.


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