Depending on your personal financial circumstances, co-signing a mortgage for someone else can make it more challenging to qualify for your own mortgage or reduce the loan amount you can afford.
If you co-sign on a mortgage for another person before you buy your own home then the total monthly housing expense including the mortgage payment, property tax and homeowners insurance for that property is included in your debt-to-income ratio when you apply for your own mortgage. This requirement applies even if the other person on the mortgage with you occupies the property and pays all or part the monthly housing expenses, including the mortgage payment.
Because of this guideline, if you co-sign a mortgage for someone else, you need to earn sufficient income to afford the mortgages on two properties when your apply for your own loan. For example, if the total monthly housing expense (mortgage payment, property tax and insurance) for the property you are a co-signer on is $2,500 then this figure is added to your monthly debt expense when you apply for your own mortgage.
If you have $500 in other debt expenses for credit cards and car, personal and student loans, then the total monthly debt figure the lender uses to determine what size mortgage you qualify for is $3,000 ($2,500 (expenses for co-sign house) + $500 (personal debt expenses) = $3,000 (total monthly debt expense)).
If you make a lot of money then including the extra housing expense may be less of an issue as you still may be able to afford the mortgage amount you want. But if you are on the border in terms of qualifying for your own loan, then the extra debt expense could disqualify you prevent you from getting the mortgage you need.
If you are not a co-signer on the other property then the lender only includes the $500 in personal debt payments to determine the mortgage you qualify for. In short, the lower your monthly debt expense, the higher the mortgage amount you qualify for.
This is why co-signing on a mortgage for someone else usually reduces what size mortgage you can afford on your own, depending on how much money you make, and why we usually recommend that you buy your own home first before you co-sign a mortgage for a relative or friend.
You can use our How Much Home Can I Afford Calculator to determine what price home you can afford based on your monthly gross income and debt expense. If you want to understand what price home you can afford if you co-sign a mortgage for a friend or relative, then you include the monthly mortgage payment, property tax and insurance cost for that home in your debt expense along with your other loan payments.
To determine how much home you can afford if you do not co-sign the loan then only include your personal debt payments. As our calculator demonstrates, qualifying for a mortgage and buying a home is much easier if you are only responsible for the mortgage on one home, instead of two.
One question people frequently ask is why do lenders include the full monthly payment for the mortgage I am a co-signer on instead of only half of the payment? After all, there is another borrower who helps pay part or all of the mortgage. This is because if the other co-borrower experienced financial hardship you are solely responsible for paying the mortgage and the lender’s qualification analysis reflects this worst case scenario.
Another common question is what happens if the other co-signer pays half the mortgage payment or pays me rent? Lenders typically only allow you to include rental income if you can provide tax returns that show you have received the income for at least two years, although some programs only require a one year rental history, depending on certain circumstances. If you cannot document a track record of rental payments then lenders are unlikely to add that income into your debt-to-income ratio to offset the mortgage payment.
We always recommend that you contact multiple lenders to understand how they would handle your personal situation. You can review lenders in your area on the table below. We advise you to contact at least five lenders as qualification guidelines vary, especially as it pertains to mortgage co-signers.
You can also use our Mortgage Pre-Approval form to get pre-approved for your loan. Getting pre-approved enables you to understand what size mortgage you qualify for and review key issues in advance such as the impact of being a co-signer on another mortgage. Our Pre-Approval form is easy-to-use and requires minimal information.
Co-signing a mortgage can be very beneficial in helping someone else buy a home but be sure to understand the consequences and potential downsides, especially if you want to apply for for your own mortgage in the future.