Of home purchase loans in the U.S. the percentage including a co-signer continues to increase, according to ATTOM Data Solutions. With rising home prices and interest rates, and intense competition among buyers, first-time homebuyers are facing tough financial challenges. They’re often asking parents, grandparents and other friends and relatives to co-sign a loan in order to make their American Dream happen.
As a real estate agent, you’re not obligated to provide financial advice on this topic, but it would be helpful to be prepared with some co-signing red flags if asked. Here are just a few to mention:
Encourage the co-signer to speak to a professional
This is non-negotiable. Perhaps you can recommend a financial planning professional if they don’t already have one.
Be sure the co-signer realizes the responsibility involved
The co-signer is completely responsible for the loan obligation, even if the person buying the property is unable to continue to make payments. There is no negotiating out of a co-signing agreement. That’s the entire point of having a co-signer.
Co-signing could affect credit scores
If the loan becomes late or goes delinquent, the co-signer’s credit score takes a hit. If this happens, your ability to apply for credit in the future could be affected. That includes your ability to buy a car, get a personal/business/student loan, or even buy a house.
A co-signer’s debts will also be on the table
A co-signer must provide paperwork and meet the same credit requirements as the borrower. This includes bank statements and income tax returns. The goal is to have both borrowers lowering the debt-to-income ratio (DTI) for the loan. Fannie Mae and Freddie Mac allow a “blended ratio” DTI that combines the incomes of the occupant and non-occupant co-borrowers. This usually happens in the situation when parents help a child buy a house.
Ask the co-signer if their help is going to be able to help the borrower beyond applying for the mortgage
If a borrower needs a co-signer to begin with, it’s possible that maybe they should instead opt for a more affordable or less expensive home. Ask the co-signer to consider if they think the borrower is going to be able to handle the monthly payments, and what the likelihood may be that the borrower may fall behind.
Ultimately, the borrower and co-signer must consult with a financial planning professional to understand the consequences of a co-signing agreement. However, your basic advice could be very well appreciated by both parties, and could help avoid possible disastrous results.
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