How co-signing on a debt impacts qualifying for a mortgage

As a Licensed Mortgage Originator, I often see credit reports where the borrower has cosigned on a debt for a family member or friend.  You may be a parent co-signing on your child’s student loans to help them get a better rate, helping your brother buy a car by co-signing the lease or auto loan or perhaps co-signed on a family members mortgage so they can buy a home. They’re going to be responsible for the debt and making the payments and you’re helping them out. Often times, folks don’t realize how this good deed may impact them qualifying for a mortgage down the road.

If the debt you have co-signed, is not paid on time, it will impact your credit as if YOU are the one not making the payments. Depending on how recent and how severe the late payments were, this may possibly rule out any chance of you qualifying for a mortgage. Co-signing is a risk. The friend or family member you’ve helped out has no way of knowing in the future what their employment or health situation may be. Worse case scenario, you may find yourself liable for that debt.

If the debt you’ve co-signed is paid on time, the impact may not be as dramatic for qualifying for a mortgage as long as a few requirements can be met:

• co-signed debt needs to have been made on time for the last 12 months; and
• the party you co-signed the debt for needs to provide 12 months cancelled checks to document they have personally made the payments.

What if your sister has been giving you cash every month for the debt you co-signed? That debt will be factored into your debt-to-income ratio as your own for qualifying for your new mortgage. If there is not a significant track record (such as 12 months) showing the debt has been paid on time, it will most likely be factored as your debt for qualifying purposes.

If you are considering buying or refinancing a home and you have co-signed for a debt, you may want to:

• see if your friend or family member can refinance the debt into their name, removing yours from the obligation; or
• have your friend or family member start making the payments for their debt on their own with a check. Keep copies of the copied checks as you will need to document that the last 12 months of the debt was paid for by them and not by you.

It’s important to meet with a mortgage professional well in advance if you’re considering buying a home. If you’re buying or refinancing a home anywhere in Washington State, I’m happy to help you.