If you take out a loan for someone else are the payments you receive from the other person to pay the loan counted as income when you apply for a mortgage?
Taking out a loan for someone else such as a friend or relative is usually considered a good deed. Perhaps the other person has poor credit and cannot qualify for the loan on their own so you step in to help.
Examples of this include opening up a credit card account or getting a car loan for someone with credit challenges. In an ideal scenario after you get the loan the other person gives you money so you can make the required loan payments.
While there are multiple reasons to pitch in and help someone, taking out a loan in your name for someone else can create challenges, especially if you plan to apply for a mortgage in the future. Below we review how the loan and any payments you receive affect your ability to qualify for a mortgage.
First off, any required monthly payments for a loan in your name are included in your debt-to-income ratio when you apply for a mortgage. Lenders count the payment obligation as your debt even if you receive money from someone else to make the payments or if another person makes the payments directly to the creditor.
In short, if your name is on a loan, you are legally responsible for the loan and the required payments count as debt for you. This guideline applies regardless of the type of loan -- be it a credit card, line of credit, car loan or personal loan.
So if you take out a car loan for a relative and the monthly payment is $500, the lender includes that $500 in your debt-to-income ratio even if your relative makes the car loan payment. The payment is added to your other personal monthly debt expense to determine the mortgage you can afford.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford
The higher your monthly debt expense, the lower the mortgage you qualify for. If the loan you took out has a high monthly payment, this may make it challenging for you to afford the mortgage you want.
The other point to keep in mind is that any money you receive from the person you took out the loan for is not counted as income when you apply for a mortgage. Returning to the example above, even if your relative makes the car loan payment directly or gives you money for the payment every month, their payment is not included in your mortgage application.
From the lender’s perspective it is as if the payment does not exist. The reason for this is because although you are legally responsible for the loan -- because it is in your name -- the person you took out the loan for is not legally obligated to pay you or the creditor.
In fact, from a legal standpoint the person you took out the loan for can stop paying you or the creditor at any time. That would make them a bad friend or relative but you would be required to continue paying the loan or risk damaging your credit.
If you have high income relative to your personal debt expenses then taking out a loan for another person may not significantly impact your ability to qualify for a mortgage. If your monthly debt payments are already relatively high then you may want to think twice before you take out a loan for someone else or consider a different approach to helping.
If it is financially feasible, instead of taking out a loan you are likely better off providing the loan directly to the person you want to help. For example, instead of taking out a $10,000 car loan for your relative, if you have sufficient funds, offer them a $10,000 loan.
In this scenario the monthly loan payments you receive do count as income when you apply for a mortgage as long as you have received the payments for at least a year and the payments are expected to continue for at least three years. It is also important to execute an agreement that outlines the key loan terms including the amount, interest rate, monthly payment and loan length.
In summary, taking out a loan for someone else can make it much more challenging to qualify for a mortgage. This is because the monthly payment is counted as debt for you while any payments you receive from the person you took out the loan for are not included in your income.
Rather than getting a loan for a friend or relative, proving a loan may be the better financing option. In some cases this approach may actually help you qualify for a mortgage or increase the loan amount you can afford.
The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to understand their qualification guidelines and to confirm the mortgage you are eligible for.
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Sources
"B3-3.1-09, Notes Receivable Income." Selling Guide: Fannie Mae Single Family. Fannie Mae, October 2 2019. Web.
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