To first-time buyers struggling to qualify for a mortgage, having a relative or close friend co-sign the loan may seem like a good idea. And if you know a buyer in that position, and you have good credit, you may be tempted to help them out.

However, co-signing is not a small favor. It links two people’s finances, credit histories, and long-range plans in ways that both parties don’t always expect. So, before you invite someone to co-sign your loan, or agree to co-sign for someone else, it helps to understand exactly what’s at stake.

What is Co-Signing?

When someone co-signs a buyer’s mortgage, they add their income, credit history, and overall financial strength to the mortgage application, so the lender feels more confident approving the loan.

The loan approval process for a co-signer is the same as the buyer. Lenders look at the co-signer’s credit, review their income sources, and verify debts, assets, and employment. In many cases, the co-signer’s financial profile can help offset weak credit or high debt on the buyer’s side, which is often the reason people consider co-signing in the first place.

Co-signing is different than co-borrowing, which is common when the buyers are a couple. Co-borrowers share ownership interest in the home and appear on the title. While a co-signer could be potentially be placed on the title, they are usually tied to the mortgage, not the home itself.

Responsibilities and Risks

Agreeing to co-sign a mortgage means that both the home buyer and the co-signer are responsible for making payments on the mortgage. If the buyer loses their job, falls behind on bills, or simply forgets a due date, the lender will expect the co-signer to step up and ensure payments are made on time—whether they ever set foot in the house or not.

Co-signing also means that the entire loan balance counts toward the co-signer’s total debt. This can make it harder for the co-signer to qualify for future loans themselves, because lenders will factor the mortgage into their debt-to-income ratios. Also, if the buyer misses a single mortgage payment, it can cause both the buyer’s and the co-signer’s credit to drop.

For this reason, co-signing can sometimes create strain between buyer and co-signer, even when both parties start off with good intentions. If the buyer loses their job or gets hit with unexpected expenses, the co-signer may suddenly be carrying the financial responsibility for a home they don’t live in, which can lead to feelings of resentment or stress.

Removing a co-signer from the loan is not a simple process, either. The lender will need assurance that the remaining borrower can qualify for the loan independently, which is usually accomplished by refinancing the loan.

An Ounce of Prevention

While co-signing can help new buyers achieve their homeownership goals, it’s not a decision to be made lightly.

Co-signing works best when both parties treat it like a long-term partnership. Before anyone signs, it helps to have an honest conversation about income, spending habits, job stability, and what should happen in a financial emergency.

These talks can feel uncomfortable, especially if it’s between relatives or friends who don’t typically discuss money. But before you ask someone to co-sign your mortgage, or agree to co-sign for someone else, it’s worth taking time to look at the full picture and what could happen down the line.

If co-signing doesn’t feel right, there are loan programs designed for new buyers that offer a path forward without shared debt.

For example, our First Time Homebuyer Loan program helps buyers finance up to 97% of their home’s purchase price with just a 3% down payment, which helps buyers achieve homeownership without hefty upfront costs. Plus, teachers, firefighters, police officers and first-responders qualify for additional financing incentives.

If you have more questions about co-signing, the loan experts at Right By You Mortgage can help. Find a local mortgage loan officer or drop a note to inquiries@rightbyyoumortgage.com.