Prices of homes have been steadily increasing in Boulder County for years. As these prices have risen, it has been more difficult for first-time home buyers to enter the real estate market. In a place like Boulder County, it’s important to get into market as soon as possible. As the old saying goes, “You can’t out save the market”. No matter how hard you try, the home prices continue to go up faster than you can save for a down payment. One option for first-time home buyers is to look for a co-signer. There are many ramifications of being a co-signer and this makes a close relative or loved one the best choice.
However, all parties involved need to go in with their eyes wide open before agreeing to this type of arrangement. To do this, first meet with a qualified mortgage loan officer to determine what the buyer would qualify for on their own and then what they would qualify for with a co-signer. Next, it would be wise for both parties to meet will a financial planner to make sure all parties are on the right track with their decisions. A financial planner can help determine if the overall transaction is realistic. Often the primary borrower will end up borrowing more than they can really handle, then the co-signer is asked to step in to help out – and that can put a strain on their relationship.
It is important for the primary borrower to know what they are asking of a potential co-signer and also for the co-signer to have an understanding of what they are getting into.
Here are a few items for primary benefiting buyer and the co-signer to discuss:
Co-signing a mortgage will affect your credit. If the person you are co-signing with doesn’t make the payments, it will appear on the credit reports for both parties. That could lower the co-signer’s credit score and affect the co-signer’s ability to qualify for a loan of their own. Make sure you feel comfortable being responsible for making the payments if the other person does not.
Speaking of responsibility, as a co-signer you are jointly and severally liable for the loan. This is a fancy way of saying if the primary borrower suffers a job loss, the co-signer is responsible for making the payments in order to maintain good credit.
As a co-signer, the loan will be added to your total debt ratio. If you aren’t planning on applying for a loan of your own anytime soon, that may not matter to you. However, if you are planning to apply for one, the co-signed loan will figure into your total debt payments and might affect your ability to qualify for a loan. According to Jessica Shanahan, a loan officer at Premier Lending in Boulder, once the loan has seasoned for a year, the monthly debt will no longer be considered if the co-signer is applying for another mortgage. Be sure to check with your mortgage lender to see what specifics apply to the particular loan program you are using.
Get ready for a loan application. Often co-signers think all they need to do is simply sign their name at closing. A co-signer will be required to go through the same loan application process as the primary borrower. This means providing all of your financial information to the lender for them to assess your credit worthiness. This can be a significant and time-consuming experience.
Think back to the initial meeting with your mortgage loan officer and financial planner. Ask yourself whether or not co-signing with a benefiting buyer is truly an advantage. If the proposed payments are more than the primary borrower can afford, you will likely be called upon to help with those monthly payments. That is fine if you are prepared to do so and can manage it.
Other options to consider when helping a first-time homebuyer or anyone who may need help with a mortgage loan:
Consider gifting enough down payment so that the mortgage loan amount is low enough for the primary borrower to qualify on their own. If a borrower can come up with 20 percent down payment, they can also eliminate private mortgage insurance on conventional loans, making it easier to qualify.
Consider buying down the interest rate to lower the payment to a level where the primary borrower can qualify on their own.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com,
call 303.441.5611 or visit BoulderPropertyNetwork.com.