You love John and he loves you. Things could not get any better. You’re even thinking about making that next big step together – buying a home. It sounds like a good idea, but there’s a catch. One of you has less than stellar credit. Cosigning a mortgage loan is one option, but there are pluses and minuses to consider in this situation. Read below to gain a better idea of the ramifications of cosigning a loan with your significant other – both the bad and good:
1. More buying power
Two incomes are obviously better than one, so if you both have money to contribute, going in on a home together could earn you a larger dwelling or a more desirable neighborhood. In addition, if one of you has bad credit, by cosigning a loan, you are likely helping that person get a better interest rate than he or she could have obtained on their own.
2. An investment you can make together
Buying a home with your significant other can serve as a great investment in your future together. You can research properties, chose one that suits both your tastes and make modifications to reflect you as a couple.
3. Strong form of commitment
Cosigning a loan together is a huge decision. As a result, making this sort of commitment serves as a foundation for your relationship. In doing this, you are saying, I trust you and I want to make this long-term investment with you – despite any past credit problems or financial risks.
4. Help establish credit
By investing in a home and making your payments on time and in full, both of you are building equity. This is a win-win situation for both the person with bad credit and the one with good credit.
1. Risk to your credit score
Just as purchasing a home together can build your credit, it can also hurt your credit should your situation change – whether that is a misstep in your relationship or a problem in your financing. If you can’t make your payments for one reason or another, your credit score could take a hit. Moreover, even when making your payments, your ability to take out a personal loan may still be limited simply because of your outstanding loan – regardless of your good credit rating.
With this in mind, make sure that both of you are on the same page as far as your relationship and its future. In addition, look at your jobs and your investments to ensure they are secure. Lastly, consider working with a financial advisor to figure out your spending capabilities and what you can realistically afford.
2. Risk if the relationship deteriorates
If your relationship takes a turn for the worse, you and your cosigner may face some tough decisions. You may be forced to sell your home if neither one of you can afford to make the mortgage payments without the other’s help. Also, your names will both remain on the mortgage for as long as the mortgage loan is in effect. If you decide that your significant other will take over the mortgage, you will have to work with your loan provider if you want to get your name off the loan. However, lenders are not apt to make this easy for you and ending the loan arrangement will probably take a lot of time, money and effort. Even if you are able to terminate the contract, your credit score – as well as your partner’s – may suffer. And remember, as long as your name is on the loan papers you are responsible for the loan - even if you no longer live at the house and your partner makes the mortgage payments.
3. If your co-borrower defaults, you could be left holding the bag
No one likes the idea of their significant other walking out, but if it happens, you could be left paying the mortgage alone, as well as any late fees or collections. To make matters worse, if you cosign a loan with some sort of personal property as collateral, these things are at risk of being taken away should you become unable to pay the loan yourself. To defer this situation from happening, pay close attention to the terms and conditions of the loan agreement and discuss this scenario with your lawyer. As the old saying goes, it is better to be safe than sorry.
4. Added stress to your relationship
Owning your own home is hard work. When looking at properties, be sure to not only factor in the monthly costs of your mortgage, taxes and home insurance, but also think about all of the other expenses associated with owning your own house – including utilities, lawn care, home improvements and furnishings.
At the end of the day, the act of cosigning a loan with your significant other, regardless of credit history, hinges on the strength of your relationship. Think long and hard about the current stability of your union and how this new investment will affect it. Also, think about the effect this investment may have on your financial security – including YOUR credit score. Remember, financial differences are the number one reason why couples break up, so you both have to feel good about making this commitment. If this is a one-sided venture or if you have doubts, you may want to rethink cosigning the loan.