The price of homes has been steadily increasing in Boulder County and Northern Colorado for years. As prices have risen, it has been more difficult for First Time Buyers to enter the real estate market. In a market like ours, it is important to get into the market as soon as possible. There is an old saying, “You can’t out save the market”. That means no matter how hard you try; the prices will increase faster than you can save, especially for a down payment to make your first purchase.
In 2024, more factors have been tossed into the works. For instance: increased home values, property tax assessments and thus property taxes have increased significantly. Many properties have seen taxes go beyond 30%. Additionally, there’s an increased need and cost of insurance. Due to huge fire and hail losses to insurance companies in Colorado, many property owners have seen insurance rates going up over 30%! Combine all three factors and you’ll find it costs much more to buy the same house than it did just a couple of years ago. The question is, “Will it get cheaper to buy a home?” Probably not! It is likely to continue to get more expensive. Therefore, it makes sense to do everything you can to get into the market, as soon as possible.
One option for First Time Buyers is to look for a co-signer. There are many ramifications of being a co-signer, making a close relative the best choice for a potential cosigner.
However, even with a close relative, all parties involved need to go in with their eyes wide open before agreeing to the arrangement. The way to do that is to first meet with a qualified Mortgage Loan Officer to determine what a buyer might qualify on their own versus what they would qualify for with a co-signer. Next it would be wise for both parties to meet with a financial planner to make sure they are on the right track to make the best decisions. The financial planner can help determine if the overall transaction is realistic. Often the primary borrower will end up borrowing more than they can handle. In which case, the co-signer would be asked to step in to help and that can put a strain on a relationship.
It is important for the primary borrower to know what they are asking of a potential co-signer as well as, for the co-signer to understand the potential commitment they are making.
Here are a few of the things to discuss, before an arrangement is made:
- Co-signing a mortgage will affect your credit. If the person you are co-signing for doesn’t make the payments, that could affect both parties’ credit reports. That could lower the co-signers credit score and effect their ability to get a loan of their own. Make sure you feel comfortable being responsible for making the payments if the other person does not, or cannot.
- Speaking of responsibility, as a co-signer you are jointly and severally liable for the loan. Which is just a fancy way of saying: if the person who is the beneficiary of you being a co-signer suffers a job loss, you are responsible for making the payments, to maintain good credit.
- As a co-signer, the loan will be added to your total debt ratio. Which may not be an issue, if you aren’t planning on getting a loan of your own anytime soon. However, if you are, the co-signed loan will figure into your total debt payments and might affect your ability to qualify for a loan. According to most lenders, once the loan has seasoned for a year, the monthly debt will no longer be considered if the co-signer is applying for another mortgage or loan. Be sure to check with your lender to see what specifics apply to the particular loan program you are using.
- Get ready for a loan application! Often co-signers think all they will be doing is signing their name at closing. A co-signer will be required to go through the same loan application process as the primary borrower. That means providing all your financial information to the lender for them to assess your creditworthiness. This can prove to be a significant and time-consuming experience.
- Think back to the initial meeting with the Loan Officer and Financial Planner. Consider whether co-signing with the benefiting buyer is really a benefit. If the proposed payments are more than the primary borrower can afford, you will likely be called upon to help with those monthly payments. Which is fine if you are prepared to do so and can handle it.
Other options to consider when helping a First Time Buyer:
- Consider gifting enough to the down payment so that the loan amount is low enough for the primary borrower to qualify on their own. If a borrower can come up with 20% down payment, they can also eliminate private mortgage insurance on conventional loans, making it easier to qualify.
- Consider buying down the interest rate to lower the payment to a level where the primary borrower can qualify on their own.
Your professional Realtor®, lender and financial planner can help you make the right decisions.