How Does Being a Co-Signer Affect a Mortgage Application?
Co-signers may be added to mortgages, especially when people are buying a house for the first time. First-time homebuyers typically have little credit on their records, and that increases the risk of a default from the perspective of the lender, which has little evidence that the buyer pays off loans. To solve the problem, the buyer brings another person into the mortgage, known as a co-signer. This changes the mortgage contract is several key ways, especially from the perspective of the co-signer.
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Co-Signing
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Co-signing occurs when a second individual signs the mortgage contract along with the homebuyer, the person using the loan to purchase the property. Typically, co-signing requires more than just signing the mortgage contract -- the co-signer's name also may show up on the deed to the house and other important financial information. The co-signer does not gain access to any mortgage finances, but does assume financial responsibility for the loan.
Mortgage Qualification
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For many lenders, having a co-signer on the loan decreases the risk involved and allows the buyer to qualify for the necessary loan package to buy the desired house. However, lenders do not accept co-signers without question, even if they have much more credit history than the buyer. Co-signers must submit to as thorough a credit examination as the buyer to allow the lender to ensure the co-signer has a history of making payments and, preferably, has a high income level. Some co-signers may be refused, because the purpose of co-signing is to improve the overall qualification of the application.
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Mortgage Obligation
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The reason lenders are interested in co-signer credit is that the mortgage contract becomes upheld by this signer. If the buyer (the first signer on the contract) cannot make mortgage payments, the obligation to pay is immediately transferred to the co-signer. Co-signers should carefully consider the decision to agree to support a mortgage, because financial problems the buyer goes through can create problems for the co-signer as well, including legal action taken by the lender. The lender benefits from the process, because it puts another level of profit potential between it and a foreclosure.
Switching Co-Signers
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A buyer can sometimes change co-signers, but only in certain situations. For instance, if a refinance replaces the existing mortgage with a new version, the buyer may have the option to switch to a different co-signer when creating the new mortgage. The lender requires a new credit check in this case and may not approve the new co-signer if his credit rating is not similar to the former co-signer's credit rating. Alternatively, the buyer may be able to refinance and remove the co-signer entirely if the buyer's credit status has improved enough.
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