Co-Signing for a Friend

[Anonymous]

Firstly, I'd like to  apologize for brining up a topic that I know has already been discussed in greatl detail here already...

I have a feeling a very close friend of mine is going to ask me to co-sign (or borrow, is there a difference?) on a mortgage loan that he is going to undertake with his wife.

I believe he will pose this to me as a temporary thing, in which he will attempt to re-finance after a year and ideally get approved on their own (him/his wife) at that point, thus not needing me any longer.

Let's approach the situation this way, I believe and am very confident in their ability to pay their mortgage on their own, whether it be just for the next year or beyond that.

If I did indeed agree to co-sign for them and they made timely, full payments over the course of the next year and ideally were able to refinance with just themselves being at risk, how does this effect my credit (if at all)?

In other words, what will be the immediate impact of undertaking the loan on my credit, if any? In addition, if they did make payments full/on time during my time as the co-signor, how will that affect my credit?

If all things work out and I exit the agreement after a year, will this have any potential outcome on how the banks will view me as a borrower when I attempt to get a mortgage several years down the road for myself?

Basically, if all things work out over the period of the next year while I'm the co-signor, what will be the net affect on my credit after they refianance and I am no longer at risk, is there any way I come out positive/neutral from the situation or will my score be knocked down regardless?

Thank you for any insight/information in advance.

[disdreamin]

First and foremost, I would co-sign on a loan only if I were the one making the payments, and the other party would make the payments to me.  Otherwise, I don't believe there is any way you will know for sure there aren't late payments being made (I'm sure others will correct me if this is wrong).  Additionally, I would not do it - no matter how much faith I had in my friend/family member - unless I could comfortably make the payments on my own if anything were to go wrong.  Just my $0.02, FWIW.

I'll share my person thoughts on the idea in general...what if something went awry and the friends weren't able to pay the mortgage, but also had no place to live?  What would you do if this came to pass?  I doubt you could get them out of the home if they were on the deed and mortgage, and you'd be stuck paying for a house.  This is absolute worst-case, but honestly, there is no way I would do what you are contemplating, no matter how much faith I had in my friends.  If the banks won't loan them money on their own, IMO there is probably a valid reason and pehaps they need to take some time to save up for a downpayment or whatever.

Lastly, holding a mortgage would, in the long run, likely help your credit, I believe.  Short tem, I don't know.  I know the hard pull may bring your FICO down initially, but I'm sure 1+ years of on time mortgage payment would be a help.

[Anonymous]

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@Anonymous wrote:

Firstly, I'd like to  apologize for brining up a topic that I know has already been discussed in greatl detail here already...

I have a feeling a very close friend of mine is going to ask me to co-sign (or borrow, is there a difference?) on a mortgage loan that he is going to undertake with his wife.

I believe he will pose this to me as a temporary thing, in which he will attempt to re-finance after a year and ideally get approved on their own (him/his wife) at that point, thus not needing me any longer.

Let's approach the situation this way, I believe and am very confident in their ability to pay their mortgage on their own, whether it be just for the next year or beyond that.

If I did indeed agree to co-sign for them and they made timely, full payments over the course of the next year and ideally were able to refinance with just themselves being at risk, how does this effect my credit (if at all)?

In other words, what will be the immediate impact of undertaking the loan on my credit, if any? In addition, if they did make payments full/on time during my time as the co-signor, how will that affect my credit?

If all things work out and I exit the agreement after a year, will this have any potential outcome on how the banks will view me as a borrower when I attempt to get a mortgage several years down the road for myself?

Basically, if all things work out over the period of the next year while I'm the co-signor, what will be the net affect on my credit after they refianance and I am no longer at risk, is there any way I come out positive/neutral from the situation or will my score be knocked down regardless?

Thank you for any insight/information in advance.

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Nothing positive could come out of this so if I was you I would think really long and hard about doing this.  By co-signing you will not get any benefit from them making ontime payments.  Your credit will however suffer if they miss a payment or forclose as that info will also go on your credit as well.  If you yourself would want to buy a home, you would need to have a salary capable of covering two mortgages if they are not successful at a refinance and if they do foreclose your stuck following the same rules as they would if you wanted to buy again.  Family and friendships have been tarnished/lost from things like this.  Imo if they don't need to buy right now, they could easily work on their credit for a year as well as save for the costs associate with buying.  Since you found this site I would suggest you point them here as well as their is plenty of info to point them in the right track to improving their credit to be able to purchase a home.  I myself went from bankruptcy and living with my parents to homeownership and scores near 800 so it can be done

[llecs]

Great posts already.

I don't know that much about mortgages, and certainly don't know how co-signing plays into it. However, assuming that it's no different than co-signing for a car, then there's a few other points to take into consideration.

First off, someone said it already, you have to demonstrate to the lender that you can pay for both houses (yours and his) at the same time. There may be a DTI issue there. And assuming that DTI isn't an issue, would you really be willing to pay his mortgage? Is the friendship that tight that you'd give him a free home? I don't know, maybe it is. If that's the case, just give him the money vs. adding your name to the docs.

Next, if your friend can't get credit now, what will change between now and 12 months from now that would allow him/her to get credit on their own? Surely it won't improve on its own in 12 months. A year from now he may be in the same boat per his score that he is in now and won't be able to refinance. Then your stuck again. And if his/her habits haven't changed leading up to now, what would make you think they'll change a year from now? And if those habits include being late in the past, then he could be late in the future. Remember, if he's late 30 days, then you are too. If he's late 60 days, you are too. If he has late fees and added interest because he's late, you have to pay for that. If he's foreclosed on, you are too. Whatever happens to his CR, will happen to yours too if you cosign.

Finally, it may not be possible. In a typical mortgage, the lender will choose the lower of the two middle scores between the spouse and yourself if you app as a couple. In a cosign situation, your score is factors and his if you go at it together. The lender would choose the lower of the two mid-scores, and that's his. If he can't get approved now, then cosigning may not be possible anyway. If you apply for this in your name only, then you can do that, but DTI may be an issue. You can always rent it to him and have him buy it from you in the future.

[ShanetheMortgageMan]

You also may want to consider if the home loses value, and is underwater, a significant amount of money may be needed to be brought in at closing in order to refinance.  If so, would your friends be prepared?

[Anonymous]

Yeah, as everyone already stated.  Bad idea.

It is one thing to help someone in a bad situation buy a car in an emergency as an absolute last resort.  That is the type of thing that keeps someone from being able to work/handle their family, etc.  It is also the type of thing that has less affect on you if you have to take over the payments (you can drive the car, and the payments and DTI affect would be alot less).  Also, in alot of cases, people may have little or no option but to buy a car.

Noone ever needs to buy a home.  They can always rent a place.  If they do default, the risk and consequences to you are much greater and the likelihood that it could drag you down at the same time is pretty strong, especially if you are not kept in the loop until it is too late.

Next, the chance of anyone who can not buy a home right now being able to refi in a year is almost nil.  Initially, your credit takes a dip from the new account and inquiriy.  It usually takes close to a year just to get back to even (although this does vary depending upon the file).  Say your friends are at a 600 FICO score now, unless they have a decent size negative item about to be removed, there is no way to guarantee the score will get up to over whateve rminimums will be required a year from now (I would guess that by this time next year we will be looking at 640-660 minimums for most programs,but that is just a guess).  Even if the score does go up, most banks will only lend up to a certian percentage so as Shane said, either they are going to need to put alot of money down now to keep the LTV low (I would say at least 10% or more) or they are going to have to come to the table with alot of cash.

Lastly, if you have any thoughts of obtaining a mortgage for yourself in the near future, you would be risking that if you co-signed.  There is no way to tell what the lending situation or interest rate situation will be in a few years and having a bunch of your avaialable DTI tied up, as well as possibly getting bogged down in 2nd home issues (Some lenders want to see a certain amount of equity in a loan before you can buy another home without putting alot down, or they want to see alot of reserves, etc).  Bottom line, unless you have absolutely no concern about being able to make the friend's mortgage payment, no concerns about DTI issues, and are not worried about making your future loan a bit more complicated, then I would not do it.

[Anonymous]

I want to thank everyone for all of their great replys, it's pretty much what I expected.

Without going in to too much detail, I've been informed that it's less of a credit problem as to why they're running into issues... I believe both of theirs is in relatively good standing - the credit questions were mostly in regards to myself and how I would be affected in an IDEAL situation, understanding that there's a lot of downside risk for myself here.

The problem enlies in a combination of two things, as I'm understanding it.

1) In the fact that the banks are using the average of the past 2 years (I believe) of income in "the calculation". Unfortuantely, one of them went from working for a company (in 2008) to being self-employed that year (and beyond) and for whatever reason, they are not counting his salary made at the company for that year (greatly diminishing that income figure for 08').

2) He was audited this year, which took some time to fix (in the middle of being approved for the mortgage), which also threw a wrench in the middle of their situation in the form of consuming a lot of the time they had to go into closing.

Next year, when he has succesfully worked under self-employment for two years straight, the hope is that refinancing will go through much smoother... He is already putting 10% down and willing to pay all of the closing costs out of pocket in cash (not exactly sure how much weight that holds, but I know it as a fact).

As for me, I will not be looking to purchase a home for myself for another 3-5 years (at very least) and the liklihood of him/his wife not being able to make their payments (on time) for the mortgage are about slim to none - UNLESS something drastic happens, the home is devastated and it's value severly declines or someone passes away or any other thing in that extreme realm of possibility, which I understand is possible, but also extreme at the same time... I Suppose those are the risks im going to have to take if I do decide to get myself into this.

At the end of the day, I see the biggest hurrdle coming in the form of them not being able to re-finance after a year's time and having to stay on the mortgage with them for more than I had originally planned to, but then again, as I understand it, this will be more dependent on the new income calculating for 2009 and 2010, then a re-birth of their credit scores (which appear to be stable).

Thank you very much again.

[thrasher865]

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@ShanetheMortgageMan wrote:

You also may want to consider if the home loses value, and is underwater, a significant amount of money may be needed to be brought in at closing in order to refinance.  If so, would your friends be prepared?

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Similar to what Shane pointed out:

Even if the value of the house holds steady for a year, what will the closing costs of a refi look like?  I don't know how they compare to the closing costs associated with a new purchase, but if they are similar, then refinancing after one year would not even be in your friend's best interest financially.  They may be better off renting for a year, then purchasing on their own.