Most federal student loans are available to borrowers without regard to income or credit score. But this is not true of private loans. You must have good credit and earn enough to repay the debt before a private lender will provide a loan. Many students cannot qualify on their own, so they may require a cosigner. If you have loved ones attending school, they may ask you to be that cosigner. While agreeing could help them afford their education, you also need to consider the impact on your own finances. Specifically, you must be able to answer the question, will cosigning a student loan affect me buying a house before you agree.
Will cosigning a student loan affect my buying a house?
So, does being a cosigner affect buying a house? The answer is yes. But to understand why, you must understand what cosigning is and how it works. Cosigning means you agree to share legal responsibility for a debt with a primary borrower. If you are cosigning for student loans, you would provide your financial information on the loan application along with the person who is taking out the loans. Creditors would assess the risk of the loan using your information and the primary borrower’s information. When the cosigner approves the loan, you are treated as one of the borrowers responsible for repayment. The loan shows up on your credit report and if the primary borrower does not pay, the lender can take actions that impact you. Since you share legal responsibility for the debt, the answer to the question, will cosigning affect my buying a house, is an unequivocal yes.
How cosigning can affect your home purchase
There are several different ways that agreeing to cosign for a student loan can affect you. You must understand all of them to be able to answer the question, does being a cosigner affect buying a house. Here are three ways cosigning for a loan can impact your ability to buy a home.
Credit Inquiry
When the primary borrower applies for a loan, you must provide your social security number to be a cosigner. The lender will do a hard credit check, which shows up on your credit report. Too many credit checks in a short period of time can reduce your credit score. Lenders also look at recent credit checks when you apply for a mortgage in order to make sure you aren’t applying for too much debt at once.
Late Payments or Default
The loan record for any loan you cosign for is also displayed on your credit report. If the primary borrower is late with a payment, this means you will have a late payment on your credit record. If the primary borrower defaults, the lender can try to collect from you so you may end up with judgments against you. Late payments, defaulted debt, and debt collection activities can adversely impact your credit. So, does being a cosigner affect buying a house? Absolutely. If the primary borrower is irresponsible with paying the loan, you could see your credit score drop dramatically and may be unable to qualify for a mortgage at a competitive rate as a result.
Debt-to-Income Ratio
There’s also another huge factor to consider when wondering, will cosigning affect my buying a house. That’s the impact of the cosigned loan on your debt-to-income ratio. Mortgage lenders look at your debt relative to your income before they agree to give you a loan. Most lenders want your total debt payments to be below 36% of income. This includes the house payments you’d be taking on, as well as payments for all other outstanding loans. When you cosign a student loan, it counts against you in terms of your debt-to-income ratio. This can be an especially big problem if the loan has a high monthly payment, as you may have so much debt the lender won’t approve you for a loan at all or will only allow you to borrow a small sum.
What to do if you’ve cosigned and want to buy a house?
If you didn’t ask the question, does being a cosigner affect buying a house, and you’re now struggling to get a mortgage due to co-signing, you may be wondering what your options are. Your choices depend on the situation, but here are three possible solutions.
Ask the primary borrower to refinance
Refinancing is one of the best solutions when you’ve cosigned and are having a hard time buying a house because of it. If the primary borrower can qualify for a private student loan refinance loan on their own, they can use that loan to repay the one(s) you’ve cosigned for. This would mean that the debt you were a cosigner on is paid in full and you no longer have any legal responsibility for it. The primary borrower would pay the new loan off on their own. In order for this technique to work, the primary borrower would need to be able to qualify for the new loan on their own (or with another cosigner).
Wait until the debt is paid down
You can also wait until the primary borrower has paid off some or most of the debt so your debt-to-income ratio is no longer impacted. Be aware, though, that many people take years to pay off student loans. So think about your home-buying timeline when considering, will cosigning affect me buying a house?
Work with the primary borrower to make payments
You can also try to work with the primary borrower to help ensure they are paying the loan on time every month and paying as much extra as they can so you can get the balance paid down. If they are on time with payments, then at least your credit score won’t be dragged down by reports of late payments Ultimately, you should consider all of these issues and get a clear answer to the question, will cosigning a student loan affect me buying a house before you decide to move forward as being a cosigner is a bigger deal than you might think.
