Should Mom Be My Co-Signer Before Her Refi?

By Dr. Don Taylor, Ph.D., CFA,

Dear Dr. Don, My mother is thinking about co-signing on a house for me, but she also plans to refinance her house in the near future. Should she co-sign for me if she wants to refinance? Does it make a difference if she co-signs for me or not?

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Thanks, -- Lauren Loanable

Dear Lauren, Your mother co-signing your loan will have an impact on her ability to refinance her mortgage. When a person co-signs a loan, he or she is pledging to take over the payments if the primary borrower does not make them.

Your mother, by co-signing your mortgage, has taken on an additional financial obligation. Her lender will consider that in deciding whether to approve her refinancing.

It would make more sense for your mother to refinance her loan before co-signing yours. That way, she wouldn't have your mortgage counting toward her lender's debt-to-income ratios. And from your lender's perspective, she would be responsible for two mortgages regardless of when she co-signs your loan.

I get letters all the time from co-signers who regret their decision. When a lender requires a co-signer, the co-signer is taking on a credit risk the professional lender refuses to accept. Co-signers don't think they're going to end up making payments, but many do.

Did you look into a Federal Housing Administration, or FHA, mortgage as an alternative to your mother co-signing your loan? FHA lenders will approve borrowers with lower credit scores than conventional lenders, and homebuyers can finance about 96.5% of the home's value.

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