Helping a child get a home is a big undertaking. It’s much different from co-signing on a credit card or even a car. A mortgage is likely the largest investment you will make. When you have a co-signer, he takes on the liability of the home as well. Does it make it easier to qualify? We look at the specifics below.
Qualifying for a Mortgage
Qualifying for a mortgage when you just start out in life can be hard. If you just got your first ‘real’ job or you have a debt ratio, lenders may turn you down. With the help of a co-signer, though, you may have a better chance. A parent co-signer likely has more stable employment and a lower debt ratio. You can use these favorable circumstances to your benefit.
How a Co-Signing Parent can Help
Co-signing parents can help in many ways. Following are the most common:
- Lower the debt ratio
If there’s one thing lenders focus on, it’s the debt ratio. The amount of debts you have outstanding compared to your income is a big deal. If you are overwhelmed with debt, you may default on your mortgage. This may make lenders deny your loan application.
A parent co-signer can help lower your debt ratio. You get the benefit of using the co-signer’s income. But, you also take on his debts too. You don’t have to pay them, but they count towards your debt ratio. If your parent already has a high debt ratio on his own, it may not help you.
- Provides a stronger history
As a first-time homebuyer, you may not have a strong work history yet. You might have worked your way through college, but it’s not your career. If you are at your first job and it hasn’t been that long, it makes your loan seem risky. Lenders want reassurance that your income will continue.
Your co-signer can help you create a stronger employment history. Let’s say your dad worked at the same company for 10 years. That’s a lot more reassurance for a lender. The favorable employment history can help you secure the loan you want.
- Provides a credit history
There’s a difference between no credit history and a bad credit history. If you have the latter, there’s nothing a co-signer can do. If, however, you have no credit history, a parent can help you get a loan. The lender looks at your parent’s credit along with your qualifying factors to make a decision.
If you have bad credit, it works against you. Generally, lenders take the lowest of the middle scores between borrowers. If you have a lower score than your parent, your score would be used. This negates the benefit of using a co-signer in the first place.
You Still Need Good Qualifying Factors
Having a parent co-sign on a mortgage loan for you does help. But, you have to prove you deserve the loan as well. Lenders won’t give you a loan if you have bad credit, a high debt ratio, and no employment history. If you need a co-signer for one reason or another, you’ll have to make sure your other factors make up for it.
Here’s an example:
Let’s say you have no credit history. You’ve never held a credit card or student loan. You have had the same job for 3 years though. You also have no debts. Also, your debt ratio with the potential mortgage will be well below the conventional guidelines. A parent co-signer can help in this situation. Let’s say your parent has a 700 credit score, a few debts, and stable employment. He can help you secure a loan.
Now let’s say Joe has a credit score of 600. He doesn’t have a stable job history and he has some debts. His debt ratio on his own is 32% on the front-end. He considers having his father co-sign for him. His father has a 690 credit score, stable job history, and a slightly higher debt ratio. In this case, the co-signer might not help. Joe doesn’t have any qualifying factors that make up for his lack of a stable job history. His debt ratio is already high and his credit score is low. The co-signer might not help him secure a loan.
Should a Parent Co-sign?
Now comes the question – should a parent co-sign for you? Your parents likely knew the risk involved in co-signing for their child. If you default on the loan, they become responsible. It’s common knowledge. However, what you should also consider is how it affects you. If you can’t qualify for a mortgage, is it a good idea to take one on with a co-signer? If you didn’t have the wherewithal to qualify on your own, you probably can’t afford the mortgage. You could get in over your head.
Before you decide on what to do, take a step back. Ask yourself why you want a co-signer. Can you afford the loan? This is what you must consider. If you can’t afford it, you risk getting in over your head. Then you put your co-signer’s credit at risk and take a chance at ruining your relationship.
The Final Word
Just like anyone else, you should think long and hard about taking on a new mortgage. If you are close to qualifying but are missing a small piece, a parent can help. If you are nowhere near eligible for a mortgage, though, it might be a good idea to wait. Why put yourself in over your head? You might not be able to enjoy the home because you can’t afford it.
If a parent does co-sign for you, consider the consequences. Talk carefully with them about what they are about to do. Make sure there are agreements on both sides. It’s not a bad idea to have a contract between the two of you. This way if something goes wrong, your relationship is not at stake.