Should You Cosign a Mortgage? Here's What Every Potential Cosigner Must Know

Cosigning a mortgage loan for a friend or family member can seem like a helpful move, but it carries serious risks for your personal finances, credit scores, and future homebuying options. Before you agree to become a mortgage cosigner or guarantee someone's home loan, learn about how cosigning affects your debt-to-income (DTI) ratio, your ability to qualify for credit, and the legal consequences of missed payments or foreclosure.

While it's tempting to rush to help a friend or family member, you should first understand your obligations and know what might happen if the person you're helping fails to repay the loan. The big downside to cosigning someone else's loan is that you agree to pay the mortgage if the primary borrower doesn't. It's risky for your credit, and potentially your relationship with the borrower, to guarantee a loan.

Understanding the differences between a cosigner and co-borrower, mortgage default risks, and credible alternatives, like offering a down payment gift or exploring other loan options, will help you protect your credit and avoid costly mistakes. If you're considering cosigning a mortgage, review these key risks, requirements, and possible consequences before you commit.

So, Is Cosigning a Home Loan a Good Idea?

The advice for those considering cosigning a loan for a family member or friend is usually not to do it. And if you do, be sure you understand the consequences if something goes wrong.

So, before you commit to helping your son, daughter, or other loved one by becoming a cosigner on a mortgage loan, consider all of the pitfalls and learn about:

• your rights and responsibilities if you cosign
• how cosigning affects your credit reports and credit scores, and
• how to protect yourself if you decide to guarantee the loan.

Your 100% Legal Liability: Key Risks of Cosigning a Mortgage

As a cosigner, you're 100% responsible for the complete repayment of the loan. Before you cosign, ensure you're comfortable covering the mortgage payments if the primary borrower can't.

Being a cosigner on a home loan—or any loan—is a status that carries no rights at all. Unlike co-borrowers, you receive no ownership rights to the property and can face lawsuits, wage garnishment, and credit damage, all without any financial benefit.

While you'll share liability for the cosigned mortgage with the borrower, you most likely won't get an ownership interest in the property. So, you risk having to repay the loan without benefitting from living in the home or owning a part of it.

Cosigner vs. Co-Borrower: What's the Legal Difference?

How Cosigning a Mortgage Affects Your Credit Score and Debt-to-Income Ratio

If the primary borrower makes the loan payments on time, that information might or might not show up on your credit report. It depends on the creditor. Not all of them report to cosigners' credit reports when payments are made on time.

Cosigning a loan could help your credit if the creditor reports that the primary account holder manages the account responsibly and makes on-time payments. And the new account adds to your credit mix. (Having different types of credit, like mortgages and credit cards, can help your credit scores.) But even if the creditor reports the payments to the major reporting bureaus, you'll likely only get a slight benefit to your credit scores. Because you were a worthy cosigner, you probably don't need more positive notations on your credit report to boost your scores.

In fact, you'll probably see a temporary reduction in your credit scores when the lender pulls your credit before approving the mortgage loan you're cosigning. This hard inquiry will ding your credit, and so will the increase in your overall debt load. Credit bureaus factor in loans you cosign for as a debt obligation when figuring your credit scores.

Cosigning a mortgage loan raises your total debt balance and reduces your credit scores accordingly. A cosigned loan counts as your debt obligation when lenders calculate your debt-to-income (DTI) ratio for future loans. Other lenders might refuse to make additional loans to you because you could appear overextended. So, before you agree to cosign a mortgage loan, consider whether you plan to buy a house, car, or another item on credit within the period that the borrower is paying off the mortgage, which could be decades.

How Cosigning Reduces Your Borrowing Capacity

When you cosign, the full monthly payment is counted against your DTI ratio. A "DTI ratio" is the percentage you get by dividing all your monthly debt payments (credit cards, student loans, and any cosigned mortgages) by your gross monthly income. Lenders use DTI to measure if you can handle more debt. For example, if you're applying for a mortgage and your lender uses a 43% back-end DTI cap, a $1,800/month cosigned mortgage payment can disqualify you from a home purchase. This limitation lasts for the full mortgage term, which could be 30 years.

Here's how the calculation works: If the mortgage you cosigned for is $1,800/month and your own debts are $1,000/month, a lender assessing you for a loan will see your monthly obligations as $2,800, even if you aren't making the cosigned payment. Suppose your gross monthly income is $6,200. Your DTI would be $2,800 divided by $6,200, which equals 45%. Many lenders use a back-end DTI cap of 36% to 43% (some allow up to 45%) for approving new mortgages. So, a cosigned mortgage might push your DTI above the limit, and you could be denied a mortgage or approved for a much smaller loan.

Suppose your income would otherwise qualify you for a mortgage loan (meaning, your DTI for the payments on that mortgage would be under the lender's limit). But adding the $1,800 from the cosigned mortgage bumps your monthly debt up so that your DTI is over the limit, so that the lender denies your application or only approves a smaller loan.

What Happens If the Primary Borrower Defaults? Your Rights and Obligations

If the primary borrower pays late or, even worse, defaults on the loan, your credit will take a hit. The borrower might not be too concerned about negative credit reporting because they already had bad credit (obviously, otherwise, a cosigner wouldn't have been necessary).

As a cosigner, not only will your credit scores fall, but you'll also be liable for repayment of the debt, including late fees and collection costs. The lender can come after you as though you were the primary borrower. The lender might contact you and tell you that the loan is delinquent. If you don't bring the loan current or work something out, like a repayment plan, the lender might take further collection steps against you and the primary borrower, including conducting a foreclosure.

And, depending on your state's laws, the lender might pursue a deficiency judgment for the shortfall if the foreclosure sale doesn't bring in enough money to repay the loan. Some states limit or prohibit deficiency judgments. Check your state's laws, as they directly affect your potential liability. Eventually, the lender might be able to garnish your wages or levy your bank account to pay off the debt.

How to Deal With a Default on a Cosigned Loan

You'll need to make the necessary payments to get the loan out of default to protect your credit. Then, you'd want to deal with the main borrower to fix the problem. Here are a few things to think about:

• Can the primary borrower repay you for getting the loan out of default?
• Can the main borrower continue making payments? It might be better to sell the property and repay the loan.
• If the other borrower can't make payments, would it be best to take over payments and ownership of the property?

Can You Sue a Family Member If They Default? Legal Recourse for Cosigners

If you end up paying the lender voluntarily or because you got sued after the primary borrower failed to pay, you might need to file a suit against your family member or friend to get your money back. Suing a family member or a friend can destroy what was formerly a good relationship. Unpaid loans between family members can damage relationships. Consider whether your relationship with the borrower can survive a financial conflict. Saying "no" to cosigning in the first place can be hard, but it might save you a lot of stress down the road.

Also, while getting a judgment against your family member or friend probably won't be difficult, getting them to pay up might be. After winning a lawsuit, you still have to collect the money awarded in the judgment; the court won't help you with this. You might need to hire a debt collection attorney or law firm to assist you.

How to Decide If You Should Cosign a Mortgage

Following this simple yes/no questionnaire can help you decide whether cosigning a mortgage is right for you.

• Do you have $X in savings to cover the full loan if needed? If no, don't cosign.
• Are you planning to buy/refinance your own home at some point during the term of the cosigned loan? If yes, consider not cosigning because of the DTI impact.
• Do you fully trust this person with your financial security? If no, don't cosign.

6 Ways to Protect Yourself Before Cosigning a Mortgage

If you decide to cosign a mortgage loan, here are six ways to protect yourself before cosigning:

1. Get a copy of the loan documents and read them thoroughly.
2. Check the borrower's credit and financial situation.
3. Request account access and set up payment alerts.
4. Draft a written agreement with the borrower.
5. Set aside one to two months of mortgage payments in a backup fund.
6. Consult a lawyer before signing.

Keep Tabs on the Borrower's Mortgage Account

If you decide to cosign someone's mortgage loan, make sure you fully trust the primary borrower. You'll want to keep the lines of communication open between you and the borrower so you can discuss financial difficulties before they become a problem. Ask the primary borrower for access to the loan account and regularly keep track of the payments, ensuring they're paid on time. You can also ask the lender to notify you immediately if the primary borrower misses a payment. Be sure to confirm payments within two days of the due date.

Put Your Agreement With the Borrower in Writing

It's also a good idea to prepare a written agreement between you and the borrower upfront so that you both understand expectations and what will happen if the primary borrower doesn't pay. This contract should include details about payment responsibilities and dispute resolution, including:

• who must make the payments
• the payment amount, due dates, and where to make payments
• what happens if the borrower doesn't make payments and the other person starts making them
• whether the loan has to be refinanced later to have the cosigner taken off the loan (usually applicable if one borrower is initially relying on the cosigner for their good credit), and
• who must pay legal costs and fees if one borrower has to take legal action against the other.

Set Up an Emergency Fund

It's also a good idea to keep an amount equal to a monthly payment or two in your savings account just in case you need to cover a payment.

Can You Remove Yourself as a Cosigner?

Unfortunately, most mortgages don't have a cosigner release option. (Some auto loans do.) To get out of the loan, the primary borrower usually must refinance the loan in their name alone. This requires them to qualify independently, with improved credit or income. If they can't refinance, which is often the case, you're stuck until the loan is paid off or the home is sold.

Cosigning Alternatives: Gifts, Loans, and Down Payment Assistance

You could consider alternatives to cosigning, like:

• giving money as a gift (perhaps to cover the down payment)
• lending it directly to your loved one (though you still run the risk of having to sue if the borrower doesn't repay you), or
• buying the home yourself and then renting it to your family member or friend.

Or the person seeking a mortgage might qualify for a particular kind of loan that has looser credit requirements than conventional mortgages, such as an FHA-insured loan.

Also, keep in mind that a local housing assistance program or affordable homebuyer program might be available to help the home buyer, keeping you out of the picture.

When to Consult a Real Estate or Debt Relief Attorney

The risks of cosigning a mortgage loan aren't worth it for many people. If, however, you're still thinking of guaranteeing repayment of someone else's home mortgage loan after evaluating all the downsides, consider talking to a real estate attorney or debt relief attorney. An attorney can put the terms of the arrangement between you and the primary borrower into a written agreement before you cosign the loan, advise you further about the potential consequences, and answer any questions you have.