What Does Co-Signing a Mortgage Mean?
In the United States, co-borrowers or co-signers back the creditworthiness of a home loan applicant who can't qualify for a mortgage with his own financial track record. In commonwealth countries, such as Britain or Canada, mortgage backers receive the designation of guarantor. The co-signer agrees to guarantee a mortgage debt on behalf of a primary borrower so a bank will underwrite a home loan.
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Benefits
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Young borrowers may not qualify for a home loan on their own due to a lack of credit history. College graduates who wish to purchase their first home may have held a job for less than two years. Borrowers who have a high debt-to-income ratio may not qualify for a home loan under Federal Housing Administration and private lender guidelines. Because the co-signer backs the loan with his own credit, the borrower can obtain a loan he otherwise would not qualify for.
Considerations
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Co-signers must have implicit trust in the worthiness of the borrower that they back. Co-signers are usually relatives or friends of the borrower. As the cosigner backs the loan with his own credit, the cosigner must take over the monthly mortgage payments on behalf of another party. In addition, backing a loan may negatively impact the co-signer's borrowing ability if he wants to make a large purchase. For example, a co-signer who backs a $200,000 loan and has the credit to obtain a $500,000 loan is only able to obtain a $300,000 loan.
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Warning
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If the co-signer can't afford to take over monthly mortgage payments from the primary borrower, the bank comes after the co-signer. The lending institution may place a strike against the co-signer's credit score or go to court to seize his assets.
Rights
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A co-signer's name comes with the title of the home. According to the Federal Trade Commission, or FTC, co-signers should ask the lender to put in writing that the company will notify the co-signer if the borrower isn't making payments. In addition, co-signers should limit their responsibility to the loan itself, as opposed to collection fees and late payments.
Removal
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Co-signers usually back a mortgage for a limited period of time. According to the Mortgage Loan website, the primary borrower may refinance his home loan after establishing a good credit record or improving his debt-to-income ratio. If the primary borrower has substantial equity in the property and a good payment record, a bank may be willing to remove the co-signer from the home note.
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