Co-Signing on a Mortgage–Is it Good or Bad Idea ?
What would you do if a family member asked you to co-sign on a mortgage ? They need a little help qualifying and have always wanted to buy a home. They have a good jobs and the future is bright, they just need a little help to get over the hump. Sure I will help you you reply. It is important to understand the implications of your generosity.
Most loans today are underwritten to Fannie Mae/Freddie Mac guidelines. If you co-sign on a mortgage, this debt will show up on your credit report. Why does this matter? A key figure in the mortgage lending world is the Debt to Income Ratio (DTI), calculated by totaling all monthly debts/ gross monthly income. In the past, underwriting guidelines treated this scenario differently. If you were a co-signer, but someone else made the payments and they could show proof of this, this payment would be omitted in your DTI calculation. Most lenders today will add this payment regardless of who makes the payment. The rationale behind this, if one party did not make the payment, you as a co-signer would be obligated to make the payment. I have seen multiple scenarios where potential borrowers have been unable to refinance or purchase a property because their DTI ratio exceeds the 50% limit imposed by most lenders.
On another note most lenders will allow you to finance up to at least 4 properties before they will exclude you from conventional financing. You can also be on the loan, but not on title to the property and vice versa in many cases. Sometimes this is a good strategy to use. If you run into financial difficulties it doesn’t ruin both parties credit. Holding title via the DEED in California is more about how property is eventually transferred. This can be critical as I have seen many people run into costly probate issues simple because they did not fill out the vesting information correctly. I hope this helps.
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