The risks in co-signing on someone’s mortgage

Q. My credit has always been good, and my brother’s credit stinks. He just got married and they want to buy a house. I’m thinking of co-signing the mortgage. What do I need to consider?
— Brother

A. It’s very kind of you to want to help your brother, but before you do, you need to understand that you’d be taking a pretty hefty risk.

As someone with good credit, you’ll improve your brother’s chances of getting a loan at favorable rates, and you’ll likely help him improve his credit, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel.

But here are the pitfalls.

If your brother’s credit is bad, he has obviously had some credit missteps in the past, Rossi said.

“As a co-signer, you’re hoping and trusting that he has no further missteps for the next 30 years, assuming a 30-year mortgage,” Rossi said. “That’s a long time, and the only way you can get off of it is if he refinances or pays off the balance.”

As a co-signer, the mortgage will impact your credit, and as a financial planner, Rossi said he recommends people protect their credit scores at all costs.

“A degraded credit score can cost you future frustration and money,” he said. “My recommendation is to never co-sign something that you don’t have a vested interest in.”

He said the ultimate decision is always a personal one, but sometimes blood is thicker than water, so he understands why you would want to be a co-signer. Still, he cautions against it.

Co-signing a loan will make you equally responsible for the payment of the mortgage, and it will cause an immediate impact to your credit, Rossi said.

He said the immediate impact comes in the form of a higher debt-to-income (DTI) ratio, which is calculated by dividing your reoccurring monthly debt payment by your gross monthly income.

He offered this example: If your monthly reoccurring debt from your mortgage, student loans and car payments adds up to $1,800, and you earn $6,000 per month, your DTI is .30 or 30 percent (1800/6000). Add your brother’s $1,000 mortgage payment, and your DTI is now 46 percent (2800/6000).

“That can impact your ability to take on debt in the future,” Rossi said. “Most car loans look for a DTI of 36 percent or lower when considering loan applications, so expect an immediate impact if you’re planning to get a car loan in the future, and even more of an impact if you need a mortgage.”

Rossi said there are programs out there that may help your brother get a mortgage on his own. For example, there are Federal Housing Administration (FHA) loans are sold through FHA-approved lenders, which are insured by the federal government to reduce their risk of loss if a borrower defaults on their mortgage payments.

“The rates are generally a bit higher and come with some additional fees, but they’re more tolerant of borrowers with lower credit scores,” Rossi said. “Your best next step would be to have your brother speak to a mortgage broker with access to a variety of programs to see what type of loans he could secure on his own.”