Ever since Ugg married Meg and they purchased their first cave, there have been co-signers.
Back in the day, it was probably Pop Brutus and Mom Brunhilda who helped the kids qualify for their first place. Nowadays, it’s usually still Mom and/or Dad who join the youngsters on their first mortgage.
But it can be anyone, actually: another relative, friend, employer, roommate, significant other or even an investor, any of whom can agree to be on a mortgage that the first-timers couldn’t qualify for on their own.
Nationwide, 22 percent of houses purchased with financing in the first quarter of this year involved co-borrowers, according to ATTOM Data Solutions. That’s up from 20 percent for the same period last year. The rate of co-borrowing is even higher in 11 of the country’s largest cities. In Miami, the rate was 40 percent; in Seattle, 37 percent; in San Diego and Los Angeles, 28 percent.
The main reason homebuyers need co-borrowers is because they can’t qualify to purchase the house they want, says ATTOM executive Daren Blomquist, who co-signed for his wife’s sister and her husband so they could afford to buy in pricey Southern California.
The reason many first-time buyers can’t qualify is partly because houses are so costly. Housing prices are so high in some places that if younger folks don’t have help, they might be relegated to the rental market forever.
But even if prices are reasonable, some buyers don’t have the credit scores, credit histories or the debt-to-income ratios to buy. And many buyers are simply looking at houses beyond their means.
The situation is so dire, says Blomquist, some companies are offering to help young buyers in exchange for a piece of the action in the form of shared appreciation. Outfits such as unison.com and gocobuy.com are “institutionalizing the idea of co-borrowing and shared equity,” he says.
All of this begs the question: How should you approach a co-borrowing situation, both as a buyer and as a co-signer?
Actually, the most important part isn’t getting into it; it’s getting out of it. While clear heads still prevail -- that is, while both sides are excited about the deal and there have been no disagreements yet -- you should sit down together and decide how and when the deal will end.
How long will it last? Long enough, certainly, for the buyer to build up his credit, income and cash reserves so he can eventually buy out the co-signer. But what if interest rates are so high at that time that it would be unwise for the buyer to seek a new loan? In that regard, the deal might include some kind of buffer, either a period or time or a certain mortgage rate.
Of course, the main thing to decide is what share of the profits the co-borrower will be entitled to, if there are, indeed, any profits to split. A relative may not want anything in return -- thanks, Mom and Dad -- but someone else might want a healthy chunk. Say, 50 percent.
But how do you determine profit? It’s easy if the buyer agrees to sell and move on. But if there is no sale, you’ll need to know what the place is worth at the time the deal is to be dissolved.
Here, an appraisal, the cost of which should be borne equally, is in order. But if one side or the other disagrees with the valuation, it might be a good idea for each party to pay for their own appraisal. And if there is any difference between the two, you might agree now to split the difference down the middle.
What about losses? If the value of the property goes down, will the co-signer share in the loss, and to what extent? By the same percentage as he would had there been a gain?
Another aspect of the deal that people tend to forget: improvements made to the property during the co-ownership period. Usually, the buyer foots the bill for things such as landscaping and any additions. But will he have to share in the value of these and other features that add to the home’s worth?
Co-borrowers need to realize that while they are a co-signer on the mortgage, they are not on the title and have no ownership interest in the place. Yet, their own debt-to-income ratio could take a hit because they have incurred debt by co-signing. Consequently, their ability to obtain their own mortgage, home equity loan or even a credit card could be limited.
Remember, too, that if your buyer doesn’t make the house payments as promised, the lender will come to you for redress. You will be responsible not just for the payments but also late fees -- and, if it comes to that, collection fees and lawyer’s fees. And of course, late payments are likely to take a heavy toll, as is your personal relationship with the buyer.
To protect themselves, co-borrowers should insist that both they and the buyer be billed separately by the mortgage company so you will know within 30 days or so if your partner is tardy. That way, you will be able to address the issue before it gets out of hand.