What is the liability of a co-signer?
Question of the week: What is the liability of a co-signer?
Answer: This is a repeat question from last summer, but due to different reasons. Last August when the QoW was about co-signer liability, it was a follow up to the prior week’s WR&MU when the question was Can we put our college student on a mortgage?
This week the question percolates from conversations with potential first time buyers who are facing challenges purchasing a new home due to high interest rates and needing more income in the file to qualify.
For instance, Wendy has sufficient funds to purchase a $500,000 condo unit, minimal credit, and a very good credit score. One year ago, when rates were approaching and passing 5%, even six months ago when rates were around 6%, Wendy qualified for such a purchase. Unfortunately, at that time she wanted to wait until rates fell to purchase her new home.
Watching the market, having a lease expire on her apartment, and having more funds for down payment, she wants to buy her first home—but due to higher rates she no longer qualifies for the units she likes.
She asked what she could do, and I told her that her best option in lieu of nailing 6-numbers on a Lotto ticket, was if there was someone who could help her qualify by co-signing.
Getting prepared to have such a conversation with a family member, likely her parents, she wanted to know what they needed to do and what their obligations were if they did co-sign.
First, we need to make sure adding the co-signer (also known as co-borrower, I’ll use co-signer as it is less typing) enables qualifying for the desired mortgage. When a co-signer is added to a mortgage transaction all the income and liabilities are put into the same pots and then the debt-to-income ratio is calculated. For the non-occupant co-signer, we include their monthly housing payment into the calculation. In some instances, this can eliminate them as a co-signer as their housing payment is a substantial amount of their total income.
Presuming that Wendy’s parent’s income and monthly obligations are such that we qualify for the $500,000 condo, what is their liability?
Exactly the same as Wendy’s once the loan funds.
Co-signing on any credit obligation does not mean diminished obligation, or consequences, if the debt is not paid in a timely fashion, or goes into default or collection.
Each signer on a mortgage has a 100% liability on the mortgage. If title is split between two borrowers, each with a 50% ownership in the property, each borrower is still 100% obligated for 100% of the payments and loan balance.
Should the loan have late payments, go into default, negative reports will be made to all borrowers’ credit records. If the loan goes into foreclosure, the legal filing will show on all borrowers’ records.
This obligation should ensure that non-occupant co-borrowers stay aware of the timeliness of payments, and if payments are going to be late or missed have the means to help make those payments.
In the conversations I have had lately regarding co-signers, with the primary occupant borrower and their co-signers, I mention that ideally the period the co-signer will be on the mortgage should be considerably shorter than in prior years due to the high interest rates.
In our case with Wendy, if we are able to purchase as home with her parents co-signing, when rates drop to a level whereby she can qualify for her mortgage without a co-signer, we can refinance her mortgage and remove mom and dad from the mortgage, and their liability.
One question regarding the mortgage appearing on the co-signers’ credit reports is their ability to qualify for a mortgage or other credit with the co-signed mortgage payment on their credit report.
In the mortgage industry the standard underwriting guideline is omitting the mortgage, and total housing payment including taxes, insurance, homeowners association fees, if we are able to show that the other party on the loan, in this case Wendy, has made every payment for the total housing obligations for the past twelve months.
For instance, next fall Wendy’s sister June wants to purchase her first home, but need a co-signer. Wendy provides 12-month bank statements showing she has made every mortgage, tax, insurance, and HOA payment on the condo for which her parents have co-signed to June’s lender (ideally me), and Wendy and June’s parents can help June with the purchase of her home since the housing payment obligation will not be included in the qualifying for June’s new home.
I have had parents that have had three mortgages for their children on their credit reports because each of their children have purchased at least one year after the prior mortgage for a sibling has closed.
With rates high and salaries stagnant, or not increasing nearly as quickly as mortgage rates, with the likeliness that rates will possibly enable refinancing the co-signer off the property in the future, the use of co-signers to enable a home purchase, is a strong option for many families in today’s markets.
One final question: Who can be a co-signer? Co-signers must be a family member (including aunts, uncles, cousins), employer, or someone that it can be shown has a close personal relationship with the primary, and occupying, borrower.
Okay, that was not the final note, this is: you cannot co-sign to mitigate bad credit. If a borrower has a credit score below 500 and their brother has a score over 750, the loan will be eligible based on the lower score. As well, any charge offs, collections, etc that led to the low score will be included in the application package.
If you think co-signing will help you, or a family member, friend, co-worker, purchase a new home, please contact me discuss options.
To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!
Have a question? Ask me!
What inflation, what economic slow-down? Consumers were slinging credit cards all over the economy in July, pushing retail sales up 0.7% from June. One target for the slung cards was the internet, in particular Amazon during its Amazon Prime Days—the on-line retailer reported the first day of its Prime Days was the biggest single day the company has ever seen for sales. With Amazon leading the way, internet sales are up 10.3% year over year.
Retail sales are stronger, but less so, as consumer spending has shifted from retail spending to spending on services, such as travel, recreation, and bars and restaurants. The latter saw very strong gains, again, with sales up 1.4% from June. Spending on many services indicates consumers have confidence in the economy and their personal economic situation and future as such spending is discretional and not necessary.
Rates for Friday August 18, 2023 Rates continue to rise, the conforming rate is up from the prior Friday for the fifth week in a row. With consumers not showing any signs of altering spending habits, and slowing economic growth, little relief for rates can be seen on the horizon.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30-year conforming 7.25% Up 0.125%
30-year high-balance conforming 7.625% Up 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
Thank you!
Every week the WR&MU goes out to over 500 people, and per the records at Constant Contact over 50%, actually 53% the past several months, open the WR&MU email every week—not sure how many read it but that many open it. I am overwhelmed by the, dare I say following, of the WR&MU.
What is very gratifying are the replies each week from those you I have not heard from in some time, and those I hear from regularly. Before I go all Sally Fields at the 1985 Oscars, I’ll just once again say thank you for your support.
I have mentioned this before, but will repeat. My dad used to say, “why do you have all that personal stuff at the bottom of a business communication, get rid of it, no one cares if your new dog chewed your coffee table.” To which I replied, “Dad, I think that more than half the people who read this go right to the bottom to see if my dog has chewed something else, if the kids are still at camp, or to see what I have put in that section.”
I wonder how he felt the week this bottom section was devoted to him after he passed away—hopefully grateful for my kind words!
Thanks for reading any and all sections of the WR&MU.
Wow! Thank you once more time, this time for your generosity. Almost 25% of those who opened the WR&MU last week click the Red Cross donation link where you can make a donation to assist not only those on the island of Maui, but around the country impacted by disasters.
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
