By Dan Bergman
What do you do if you want to buy a home, but you can’t find a lender to extend you a loan? It’s a question some young condo buyers face.
One option many initially-snubbed buyers turn to is getting a co-signer. It works this way: a co-signer is a person who takes shared responsibility for the loan. If the co-signer has better credit, more money, or more income than you (or, ideally, all three) lenders may then extend the loan to you, based on the co-signer’s financial situation. Should you fail to pay, both you and the co-signer would be responsible for the failure – and the lender could collect from the co-signer.
While it’s tempting to ask someone to co-sign on your loan, I would urge extreme caution. Why? If you’ve been rejected for a loan, a lending professional has done an assessment of your financial situation and doesn’t believe you have the wherewithal to make the required payments. If the lender, who’d get compensated for extending you a loan, doesn’t believe you are a good investment, that’s a big red flag.
It’s easy to react with defiance and assume the assessment doesn’t really apply to you, but proceed carefully. Remember, if you cannot make the payments, your co-signer (often a parent or other relative) will be saddled with your entire mortgage. In other words, you’re taking two people’s credit and finances into your own hands. Relationships have crumbled over much less.
When asking for a co-signer is appropriate:
- You don’t have a credit history yet. If, for whatever reason, you didn’t get a credit card until a year or two ago, and you rent from someone who owns a two-flat, so you just pay them directly with a personal check, and you don’t have a car (or car payments), it’s quite possible that you simply don’t have a long and detailed enough credit history to demonstrate to a lender that you’re financially responsible.
- You’re still building a work history. Similarly, let’s say you just finished your MBA, and landed a great salaried job. After working at your new job for six months, you’ve decided this is a company you want to be with long-term. Your current salary certainly supports your interest in purchasing a home, but because you don’t yet have two years of steady income, you might still be turned away. This is a situation where you could be a good candidate to use a co-signer.
- Your job is commission-based. Most lenders want to know your annual “guaranteed” salary. If you have a job that pays on commission, or if you’re an independent contractor with fluctuating hours, or fall into some other category of someone with relatively reliable income, that doesn’t come in at regular two-week intervals, you may be turned down for a loan, even though you know you can earn the money. Again, you’d make for a good candidate to get a co-signer.
- Recovering from a financial setback. The housing collapse in 2008 swallowed up a lot of people, for example. Or maybe a few years ago you had a medical emergency and you were unable to pay your bills. If something like that was your only financial misstep, but otherwise you’ve been able to pay your bills in full, you may consider asking for a cosigner.
- You and your spouse/partner are going in together. It’s fairly common for one spouse to be listed as a co-buyer with the other, even if only one of them has the finances and credit history to secure the loan. The reasons for this are many, but since both of you are committed to living in the home together, and otherwise already have intertwined finances, this often works out.
How to convince someone to become a co-signer:
If you feel you’re in a situation similar to these, or otherwise are ready to get a loan despite your lender’s assessment, you still need to convince someone to be your co-signer.
- Sit down with your potential co-signer and review your finances. Discuss exactly why you need them to co-sign, why you’re good for the money, and what steps will be taken to assure that the co-signer is looped into all future loan information. One major hesitation co-signers face is the fact that they are not notified if you fail to pay your monthly mortgage payments, your property taxes, or your condo association dues – at least not until the situation becomes dire.
- Discuss how you’re going to keep the co-signer in the loop. For example, maybe you and the co-signer create a joint bank account, which you fund and through which you autopay your monthly mortgage. Or you give the co-signer the login information to your online account with your mortgage company, so your co-signer can access it. The goal is to create accountability and transparency so your co-signer can feel confident you are meeting the mortgage obligations.
Other options to overcome loan denial:
- Using a co-signer may not be your best, or only solution. If your prospective co-signer doesn’t feel comfortable co-signing on a loan, but wants to help you in another way, there are options.
- They can give you a gift that increases your potential down payment, or helps pay off some of your existing debt, either of which can change your financial outlook significantly. That, in turn, can help change a lender’s mind. For example, if you’re suddenly able to put 20% down, instead of 5%, you’ll be more likely to get a loan with a lower credit score.
- A solution like this has the benefit of being a one-time transaction that helps you without jeopardizing someone else’s credit or tying them to a 30-year mortgage that isn’t even their own.
Whatever route you go, if you’re asking someone to co-sign on a loan, the key is a frank self-assessment of your finances and open communication with the potential co-signer about what co-signing means and how you can assure them that you are serious about making the payments yourself. While it may seem like a minor ask to you, remember that the risk is bigger for them.
Dan Bergman is a real estate agent with Redfin, a national real estate brokerage. He serves the northwest suburbs of Chicago, where he works to find homes that meet his clients’ needs and goals at a fair price. A lifelong Chicagoland native, Bergman enjoys mountain biking, hiking and good coffee. And, of course, he’s a Bears fan!