Do I need a Co-Signer for My Real Estate Purchase?
Purchasing a home and obtaining a mortgage is a major responsibility for first-time home buyers, not to mention a significant milestone. Many of those who find themselves at this stage in life are also taking their first steps into their career and establishing themselves financially. For this reason, first-time buyers opting to leave the rental market and purchase a home may find the need to utilize a co-signer or guarantor on their mortgage.
What is a Co-Signer and Guarantor?
The most important aspect of a co-signer or guarantor arrangement is the fact that a home buyer is transferring responsibility for their mortgage loan to someone else. A co-signer essentially becomes the co-owner on the property, and their name appears on the title. This option is generally used when the primary borrower needs assistance obtaining a mortgage due to their income qualification. A guarantor is personally guaranteeing—based on their own credit—that the mortgage will be paid and does not have ownership rights of the property. This option is generally used when the borrower’s credit score isn’t high enough to qualify for a mortgage on their own.
A co-signer or guarantor, particularly for first-time buyers, is often a parent or legal guardian.
The co-signer or guarantor assumes fiduciary responsibility and is legally bound to ensure the loan is paid in full. Their name and credit history is used on the mortgage in place of the home buyer’s. With this in mind, it is imperative that the home buyer maintains effective communication and trust with the co-signer or guarantor to ensure personal and financial success.
Pros and Cons of Co-signing Arrangements on a Mortgage
Qualifying for a mortgage is about a range of assessments on the prospective home buyer’s credit history and financial solvency. The process involves reasonable due diligence to record and assess the borrower’s identity, background and demonstrated willingness to service their debt obligations on a timely basis.
Below are key principles and facts regarding a co-signed mortgage on a real estate deal:
- The co-signer or guarantor is agreeing to provide payment if the borrower fails to fulfill their mortgage payments.
- Their credit record is affected if the borrower has missed payments or is late on the mortgage.
- They may be liable in any legal actions, and their own property could be at risk in a lawsuit.
- They assume the debt load— the amount owed— by the borrower, which will increase the co-signer’s debt load. This may impact their ability to obtain more credit.
Co-Signing is an Increasingly-Used Option
There are risks involved for the co-signer or guarantor, but a supported mortgage arrangement can enable the borrower to establish a good credit history. When a borrower is able to make
regular payments on the mortgage debt, they are also able to establishes a good record of payment. Are you looking for sound legal advice for your organization, business or corporation? Contact KGPC LLP today.