Q: If I co-sign on a house, do I lose my first-time buyer status? –Tahir
A: The precise definition of what constitutes a first-time homebuyer — and whether you would disqualify yourself from falling within it — depends largely on the specific first-time buyer program or benefits for which you’d be trying to obtain.
For example, the (now-expired) federal homebuyer tax credit program defined first-timers as those who had not owned a home in the three years preceding their purchase of the home for which they were seeking the credit.
However, many city and state first-time buyer programs define a first-timer as someone who has not owned a home in that state for the three years preceding the qualifying purchase.
Additionally, there are a number of other potential ways to revive virgin homebuyer status; for example, many states allow people who owned a home with their spouse to become born-again first-timers if they are seeking to buy a home as a single person, post-divorce.
Historically, co-signers typically always went on title to the property. However, increasingly, lenders are aware that many times a co-signer — more accurately called a non-occupying co-borrower these days — who did not want to be on title would simply quitclaim off the deed to the property immediately after closing.
Accordingly, many modern loan guidelines do not require a non-occupying co-borrower to actually be named on the deed as an owner of the property. However, to be clear, a non-occupying co-borrower may also be required to be a close family member of the occupying borrower(s) for whom they are co-signing, as well as meeting other loan qualification guidelines.
And the qualification boost that can be achieved by having a non-occupying co-borrower on the loan is mostly to the loan amount, based on income. If the occupying borrowers have subpar credit, for example, they may still not qualify for the loan, even with a non-occupying co-borrower.
So, assuming that by co-signing you mean that you would be someone’s non-occupying co-borrower, you wouldn’t necessarily lose your first-time buyer status. To be certain of avoiding this, you would need to verify with the mortgage broker that the loan program the borrower is applying for allows for a non-occupying co-borrower to sign the note and mortgage documents at closing, without going on title.
In these cases, most often the title company will require the non-occupying co-borrower to also quitclaim, or waive, any and all ownership interests in the property at closing.
But there are bigger issues, here. When you sign as a non-occupying co-borrower for someone else’s home, you are fully obligated to pay their mortgage payments in the event they don’t. That has a number of very grave implications.
If they lose their job, become disabled and can no longer work, or anything else stops them from making their mortgage payments, you’re on the hook. The bank can send a collection agency after you. The bank can even sue you. Every late payment will be reported as a delinquency on your credit report.
If the home is lost to foreclosure, that is a foreclosure on your credit report, and your financial history — under current guidelines, mortgage lenders cannot extend federally backed loans to people who have had a foreclosure within the past five years.
Also, because the loan will go on your credit, when you go to buy your own home, the lender will consider that monthly mortgage payment and potentially also the taxes, insurance and homeowners association dues, if any, on that property as bills that detract from your ability to pay for your own home’s loan.
Just like they will tally up your own credit cards, student loans and auto loan payments and decrease the mortgage amount you qualify for in consideration of the financial resources you must divert to those accounts, they will do the same for the mortgage you co-sign for.
Depending on the size of that mortgage’s monthly payment compared with your income, it is totally possible that co-signing for someone else’s loan would disqualify you entirely when it’s time to buy your own home.
Accordingly, even though it would not necessarily disqualify you from buying your own home, I would strongly discourage you from co-borrowing on a loan for someone else.
In fact, my general advice is to discourage co-borrowing entirely except in very rare cases of prosperous parents co-borrowing for their children — cases where the child is unlikely to default, and where the parent could painlessly step in and make the payments, avoiding financial injury to themselves if the child ever did default on the mortgage payments for any reason.
Those types of parents typically own their own homes already and are certainly not in an income bracket that would be concerned about or even qualify for first-time buyer programs; since that is something you are interested in, consider respectfully declining to co-sign this loan. At the very least, sit down with a local real estate attorney and let him/her sketch out for you all the potential consequences of co-signing a loan.