Co-signing mortgage a big risk

If your credit history is atrocious and you spend money long before you get it, having someone co-sign your home loan is not going to solve your problems -- unless that person plans to move in with you.

Co-signers, or co-borrowers, can help bring you up to the income needed to qualify for a loan, but guidelines can be very specific depending on the type of loan. Usually the key word is "occupancy."

According to mortgage professionals, a co-borrower will not make bad credit good. People are often mistaken that the co-borrower's credit will solve the credit problems for the person planning on living in the home. If the person who is going to occupy the home has lousy credit, lenders don't care how strong the co-borrower's credit is.

The days of finding a friend to co-sign for a loan at the neighborhood bank are long over. All persons who sign on the line are now deemed co-borrowers and are responsible for repaying the debt. Co-borrowing is a big commitment, and people need to take it seriously.

Given the recent economic conditions, consumers need to be especially careful when entering into any contractual obligation. Even when parents agree to be co-borrowers for their children, the folks need to understand that they are not off the hook until the loan is repaid. It's probable that if the kids are late on a few payments it will show up on the parents' credit report.

Most loans are sold in the secondary market where Fannie Mae and Freddie Mac are still the two biggest players. Both require that the co-borrower occupy the home if the down payment is less than 10 percent of the purchase price. The co-borrower does not have to occupy the property if the down payment is more than 10 percent, provided that the co-borrower does not have a vested interest in the transaction (real estate agent, developer, etc.).

Co-signed loans insured by the Federal Housing Administration (FHA) can be for up to 97 percent of the purchase price of a property as long as the co-borrower is a relative of the borrower-occupant. If the co-borrower does not occupy the house and is not a relative of the borrower-occupant, FHA requires a 25 percent down payment. ...CONTINUED

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