Many people don't think twice about helping out a family member or friend by co-signing credit cards and loans with them. If you're in the process of buying a home, however, you may want to avoid committing to this type of financial transaction and/or have your name removed from accounts that are already outstanding because being a cosigner can affect your ability to qualify for a mortgage. Here's what you need to know about this issue.
Co-Signed Loans Affect Debt-to-Income
Although you are not the person actually paying the debt, you can still be held responsible for making payments if your co-debtor defaults on the account. Because of this, mortgage lenders will typically factor in co-signed accounts when calculating debt-to-income (DTI) ratios. DTI is the percentage of your income that's spent debt. So, if you make $6,000 per month and have $2,000 in debts, your DTI would be about 33 percent.
If all of your accounts, including the co-signed ones, push your DTI above 43 percent, you may have difficulty getting qualified for a loan. There are some lenders who will approve mortgages for people with DTIs above that number, but you may not get the best rates or terms for them. Thus, it's a good idea to either have your name removed from those co-signed accounts or pay down your debt to an acceptable level.
Sometimes Co-Signed Accounts Don't Count
In some cases, lenders may ignore co-signed accounts when calculating your DTI. One of those times is when there's evidence the creditor won't hold you responsible for the debt if the primary account holder defaults. For example, you co-sign a credit card for your daughter and you negotiate with the creditor at a later date to be absolved of responsibility for the balance if your child defaults.
However, since the purpose of co-signing is to ensure the creditor has someone to hold liable for the amount owed in case one person stops paying, there aren't too many scenarios when this would be an option.
Another reason a mortgage lender may ignore a co-signed account is in cases where the primary account holder has made on-time payments for a period of time. For instance, if your daughter paid her credit card bill by the due date every month for 12 months, the lender may feel the risk of default is low enough the account doesn't need to be considered.
Each mortgage lender is different, so it's best to speak to a bank representative about how the company factors in co-signed account before you apply for the loan.
For more information about this issue or if you need help negotiating with a lender for a co-signed account, contact an attorney, such as at Attorneys Funding Group Inc.