How It Works

• When a co-signer applies for a mortgage with you, the mortgage lender will take the co-signer’s credit history and income into consideration during the underwriting process. If your co-signer meets the mortgage lender’s requirements, his signature offsets the default risk the bank would otherwise face should it approve your loan without a co-signer. Thus, not everyone qualifies as a co-signer. Your co-signer’s credit and income must meet or exceed the lender’s requirements for the bank to approve your loan application.
  
  Even if you qualify for a mortgage on your own, asking a loved one to serve as a co-signer on your application can help you qualify for a lower interest rate. A lower interest rate helps you save money over the life of the loan.
  
  

Dangers of Co-signing

• If you default on your mortgage payments, the lender will pursue you aggressively for payment and, if it still does not receive the overdue balance you owe, it will foreclose on the home. After the foreclosure, the lender minimizes its losses by selling the home.
  
  Unless the property is located in a state that prohibits the practice, your lender can sue you for the difference between the remaining mortgage balance and the home’s sale price. Because your co-signer is just as legally responsible for paying the debt as you are, your lender may opt to sue your co-signer instead. The consequences of losing the lawsuit include wage garnishment, bank levies and the possible seizure of the co-signer’s real estate and personal property.
  
  

Considerations

• When the mortgage lender approves your application, it reports your payments to the credit bureaus. Thus, making payments on time boosts your credit rating. Because the co-signer is equally responsible for payment, the lender also reports the mortgage on her credit report. She too benefits from the timely payments you make to your lender.
  
  If you miss a payment, your credit report will reflect this fact. Missed payments negatively impact your credit history. Unfortunately, you are not the only one whose credit suffers after a missed payment. Your co-signer’s credit also takes the hit, and his credit score will drop.
  
  

Removing a Co-Signer

• Your mortgage lender will not remove the co-signer from your mortgage simply because you request that it do so. The more individuals legally responsible for making payments, the less likely your lender is to lose money. You must either pay off the mortgage or refinance the loan into your own name to release your co-signer of his obligation to pay off your home loan in the event that you cannot.