Do you wish to own a home but cannot due to insufficient funds or an unpleasant credit score? Do not despair; you can apply for a mortgage with another person. It is called co-signing. You can jointly apply for a mortgage with another person, even if one of you does not want to live in that house.
A co-signer helps you get through the lender’s qualifying criteria, like a high credit score and absence of outstanding loans. The idea is to secure quick mortgage approval. However, it would be best to understand the facts of co-signing before settling for any co-signer.
Read more about mortgage co-signing and its implications on your taxes and finances.
Understanding Co-signers and Co-borrowers
Also known as a joint applicant or co-applicant, a co-borrower shares the responsibility of borrowing and paying for mortgages and co-owns the property. A co-borrower is primarily a spouse. However, co-applicant is the common name when applying for a mortgage with a relative or a friend.
On the other hand, if you need a mortgage but do not qualify, a co-signer comes in handy. A co-signer acts like your loan guarantor and guarantees the lender that the loan will be paid. While the co-signer does not repay the loan, they promise to take responsibility if the borrower defaults.
Unlike a co-borrower, a co-signer’s details only appear on the mortgage documents, not the property title, since they do not own the property. They also sign the loan documents and are responsible for repaying the loan if the primary borrower defaults.
Is Mortgage Co-signing Risky?
Co-signing is a risky venture that you must trade with caution. First, it raises your debt-to-income ratio (DTI). Late payments by the primary borrower will affect your credit history. Accessing financing or credit for your projects since the co-signed loan counts as a liability.
Tax Implications to the Co-signer
Co-borrowers can enjoy tax advantages through mortgage tax interest deductions. However, a co-signer does not have such privileges since they do not have rights to the property. On the contrary, you can face tax liabilities as a co-signer if the primary borrower fails to repay the loan as expected. In this case, the lender asks the co-signer to repay the loan.
Settling this loan can be challenging since you likely have your mortgage and other significant bills. Therefore, you will probably be looking at debt forgiveness. Besides putting a negative mark on your credit score, it will appear on your tax returns since the lender must report your case to the IRS.
Tax Implications to the Primary Borrower
The primary borrower in a mortgage co-signing agreement has fewer risks than the co-signer, but there are still things to consider. For instance, if you are purchasing your first home and are considering a land tax transfer rebate, working with a co-signer can limit your chances of taking advantage of this option. Your chances depend on the co-signer’s ownership rights over the property.
So, opting for a co-borrower instead of a guarantor co-signer would be best. On the other hand, you can request the co-signer to forfeit all beneficial interests from the property using a Bare Trust Agreement. Opting for this would allow you a full rebate.
In addition, it would help to know that the co-signer only plays a part in your mortgage agreement. Therefore, preparing for other costs like closing, home insurance, and property taxes is best.
Applying for a Mortgage Loan with a Co-signer
Your qualification for a mortgage co-signer depends on the loan type you want. Non-occupant co-signers can only apply for conventional loans, while occupant co-borrowers can apply for USDA loans.
Can You Remove a Co-signer from a Mortgage?
Whether you are acting as a co-signer or finding one, it does not need to be permanent. You can refinance your home later and remove or add a co-signer from the mortgage. In addition, you can remove a co-borrower from your property title and own full rights.
While this can be costly, it is a possibility that you can choose depending on your needs. The risk is worth taking, especially if you want to enjoy tax benefits without limitations from your co-signer.
Is Mortgage Co-signing a Good Deal?
Once you understand the risks and benefits of co-signing a mortgage, you can decide whether it fits you. However, even with all its benefits, finding someone able and willing to risk co-signing for your mortgage can be challenging.
The most challenging part is that the co-signer has more to consider before agreeing to the deal since they have more to lose than the primary borrower. Thus, even when the primary borrower is close to you, you should only base your decision on financial grounds.
Conclusion
Co-signing a mortgage can have significant financial and tax implications, especially if the primary borrower defaults. It would help to consider all the risks and benefits of mortgage co-signing before agreeing to the deal. Be sure that the borrower can comfortably pay the loan before co-signing.
