Mortgage loans are funded based on the creditworthiness and income of the applicants. If an applicant isn't approved on his own, or he's approved at a high interest rate, a co-signer might help the approval or reduce the interest rate. The signer is the applicant — or borrower — for the mortgage loan, who will own the property. A co-signer is another person who agrees to accept financial responsibility to repay the loan in the even that the signer defaults.
Before a mortgage loan application is approved, it goes through a review process known as underwriting. During this process, the applicant's complete finances are reviewed. The underwriter looks at the applicant's credit report and notes the debt load, and if there are any flags. Additionally, the applicant's income is reviewed through pay stubs or tax returns. After all the information is assessed -— generally with a computer program — the loan will be approved or denied and an interest rate will be set.
Adding a Co-signer
If the applicant's credit score is less than perfect, or he hasn't established credit yet, it might be difficult to be approved for the loan. If he uses a co-signer, his finances will be reviewed through the underwriting process as well. The lender takes the co-signer's credit score and income into consideration before making the decision about the loan. A co-signer with excellent credit and stable income should increase the likelihood of approval. Additionally, if the applicant was approved on his own for the loan, the co-signers better financial situation may lower the interest rate on the loan saving money over time.
Once the mortgage loan is approved, the lender will schedule a closing. Both the signer and co-signer must attend the closing. The borrower will sign all of the documents, while the co-signer will sign all of them but the security instrument. The security instrument will be a mortgage or deed of trust, depending on the state the property where the property is located. The borrower will be granted ownership of the property via a deed signed by the property's seller. The co-signer will not be listed on this deed, or have any interest in the property. Each month, the borrower is responsible for making the monthly mortgage payments, plus taxes and insurance fees. If the borrower defaults, the lender will first come to the co-signer before entering foreclosure.
It's important to realize that although a co-signer doesn't have any interest in the property, the loan will affect his credit as if he took out the mortgage. The full loan amount will appear on the co-signer's credit report. This will increase his debt-to-income ratio, which might make obtaining a new loan difficult in the future. If the borrower does default, the co-signer will need to start making the payments each month. If he cannot afford to, the property will likely be foreclosed on. This will negatively impact his credit for years.