With housing prices on the rise, young buyers with scant credit or low incomes are hard pressed to qualify for loans. Some are turning to their parents to co-sign their loans — a process that is neither easy or risk-free.
Back in February, Alex Jaffe, branch sales manager at First Home Mortgage was approached by a college senior. He wanted to take advantage of low interest rates and buy a home even though he still had a few months to go before graduation. He planned to start a job in about six months that would pay him sufficient income to make mortgage payments on the house he wanted, but at the time, he was only earning a small salary.
“The problem was he didn’t have countable income, what we call qualifying income,” Jaffe said.
The buyer’s solution was to bring in his parents to co-sign the loan. “He was able to buy the house before he started the job,” Jaffe says.
For young buyers who have someone to whom they can turn, bringing in a co-signer can help them take that first step onto the homeownership ladder.
According to ATTOM Data Solutions, co-signed loans as a percentage of mortgages nationally grew from 13.7 percent in 2015 to 17.4 percent in 2018, a 27 percent increase.
In the Washington, DC area, which has four of the 20 most expensive housing markets in the country, according to the nonprofit Council for Community Economic Research, lenders say the loans have always been one of the options buyers look at. “I wouldn’t say they’re a huge part of our business, but we usually have several in the pipeline at any one time,” says Eric Boutcher, senior loan officer with Atlantic Coast Mortgage in Fairfax, Va.
Lenders say they might be used more often except that the underwriting hurdle can be high. “Whoever is co-signing has to bring substantial income, because they have to be able to afford the new payments on top of all of their other debt,” Boutcher says.
“You’re adding up both borrowers’ debt and you’re adding up both borrowers’ income. It’s all-encompassing.”
Even if they can pull it off financially, co-signers are shouldering the potential for considerable risk.
First, and most obviously, if their kids can’t make the payments, the burden falls to them. “There’s no separation of who’s responsible for the debt,” Boutcher says. “They’re both equally responsible.”
If payment problems arise, the co-signer’s credit — and their ability to borrow at attractive terms — is compromised. “If they‘re hoping to buy a car or a vacation home in the near future, their ability to do that will take a hit,” Boutcher says.
Even if payments are made on time, there’s no getting around that their debt-to-income ratio, and by extension their borrowing ability, is affected by the additional burden they’re carrying — although for conforming loans, that encumbrance only lasts a year if payments are made on time.
“If you can show 12 months of canceled checks coming from an account that the parents aren’t on, you can get that taken off your credit,” says Boutcher.
Conforming loans are those up to $484,350 that meet the underwriting standards of Fannie Mae and Freddie Mac, the government-chartered companies that package the loans into securities and sell them to investors on Wall Street. In expensive housings markets, like many of those in the D.C. area, the loan limits are considerably higher, $726,525.
There’s a place for co-signed loans, especially in expensive areas, but they’re only feasible if the co-signers bring considerable financial strength to the table and they’re willing to shoulder the hit to their borrowing power until the co-borrowers — ready to carry on by themselves — refinance the mortgage into one that’s just theirs.