Mortgage co-signing not what it used to be

by Broderick Perkins

(4/1/2013) Housing consumers looking for a way into the recovering market are taking a hard look at getting a co-signer for a mortgage — but it could be to no avail.

"It is because most people in America do not have the credit or the income to qualify alone and they want the American dream regardless of anything else they want," said Mark K. Hicks broker owner of The Seabrooke Group in San Jose, CA.

But as Hicks discovered, "I co-signed on some properties before and it worked out well on some and was a nightmare on others."

In a co-signing deal, typically, two unmarried people who may be related or not, join forces as homebuyer and co-signer to land the homebuyer a home.

The lender examines both parties' applications, credit history, employment, income and debt-to-income ratio and other financial background factors. The homebuyer becomes homeowner, occupies the home and holds title to the property.

While the co-signer typically has no ownership interest in the property, doesn't occupy the home, or hold title, he or she is just as liable for the loan as the homeowner.

Co-signing is not co-borrowing

A co-signing deal is not to be confused with a co-borrowing deal, in which case the lender examines the application, credit history, employment, income and debt-to-income ratio of two or more homebuyers, all become title-holding homeowners and all are financially liable for the loan.

"There are many individuals in the marketplace who cannot afford the down payment and/or the monthly payments of a new home. A co-signer who has good credit and available income used to be an easy way to get a mortgage for individuals not totally prepared to pay on their own," said Chip Poli CEO of Poli Mortgage Group, Inc. in Norward, MA.

"An example is a student fresh out of college, with no job history and not a lot of money to put down on the mortgage," Poli added.

Unfortunately, the housing crisis caused banks to grow weary and wary of co-signed mortgages, according to Ft. Lauderdale, FL-based Shari Olefson, a real estate attorney and author of the new "Financial Fresh Start: Your Five Step Plan For Adapting and Prospering in the New Economy."

Compared to traditional, single, married or even co-borrowing homebuyers, co-signed deals put a smaller stake in the game. Not so much from an initial financial stake, but more from an emotional stake or position of accountability.

"Banks have learned an important lesson from the crisis. Loans with co-signers are less likely to find some resolution during a foreclosure. A borrower is more likely to walk away, because it is less likely that the bank will be able to reach everyone to work something out, due to having more parties involved. There also tends to be less accountability on the part of co-signing borrowers because of group think," Olefson said.

"It is counter intuitive, because you would think more people is better, but the opposite is true. The more people on a loan is not better, it is actually worse, because no single person holds himself or herself accountable," she added.

Today's risk averse lenders want a bird in the hand, not two in the bush, even in high-income areas with a record of solid economic growth and high incomes, such as Silicon Valley, according to Alan Russell, a loan agent with Princeton Capital in affluent Los Altos, CA on the edge of Silicon Valley.

In a real life example, Russell says a potential home buyers moves between two large Silicon Valley firms. He has one year at the new job, but received a bonus of $75,000 and annual stock grants of $70,000 — in addition to his salary. In a few years he can just about pay cash for a home.

However, while the income is taxable, the tech worker has yet to acquire a two-year income history.

"Therefore banks will not count it towards qualification. This buyer expects the bonus to continue, but since it is not being counted, uses parents as co-signers to solidify his higher price and loan amount. This made the transaction work and he got the home he wanted," said Russell, also an affiliate with the Silicon Valley Association of Realtors (SILVAR).

Another SILVAR affiliate Richard K. Miller, chief banking officers and marketing director with Cento Inc., in Campbell, CA said lenders are so adverse to co-signed mortgages there's no real pro-con comparison to make with the mortgages.

You either qualify for a mortgage with or without a co-signer or you don't.

"More and more lenders have added additional underwriting layers that make a deal with co-signing challenging," Miller said.

When considering the income-to-debt ratio, with all debt included, lenders once allowed a borrower with a co-signer to have a 50 percent income-to-debt ratio. Now that percentage is as low as 40 percent.

"With those changes, having a co-signer will not impact and improve the borrower's ability to get the financing requested in today's market. If you are qualified and meet the guidelines, you are able to manage the payments without fear of nonpayment. It's just that tough," Miller added.