When should real estate investors bring on a co-signor for an investment property mortgage?
Brian and Deni break down when it makes sense to use a co-signor for investment property loans — and when to fly solo.
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Brian: Hey, guys. Happy Tuesday. So we’re glad to be with you as you guys join us. Let us know where you’re tuning in from. We love to hear that stuff. Let us know your questions. This is a dialog. It’s not. Deni and me just talking at you. So today we are going to talk all about Cosigners for investment property loans. So how to use a cosigner to help you borrow money if your credit is not up to snuff or if you have some other challenges with getting a loan to buy rental properties, investment properties, this is how to do it. So without further ado, Deni, what is a cosigner and what are their responsibilities?
Deni: Well, people confuse cosigner and co-borrower and they are different. A cosigner has no ownership in the property itself. They’re just basically backing your loan.
Brian: Your guarantor for your loan.
Deni: Right. So if you default, they’re basically responsible.
Brian: So no upside for them.
Deni: Yeah, not really. There are a few and we’ll talk about that later. And it’s usually usually, usually it’s a very close family member or friend or something like that.
Brian: Right. You’re doing your favor basically.
Deni: Right. It’s not like you’re going to go out and look for an investor cosigner. It doesn’t. Right. But it is a good way for maybe somebody who is entering with little to no credit. It’s a little harder to get cosigners When you have bad credit, it tends to be a little easier if you have a little bit of a lower income amount like than they ordinarily would use. But if you have iffy credit, they can also help. But if you’re if you have super bad, bad credit, most banks are still not going to allow you to use a cosigner. And frankly, most cosigners aren’t going to unfortunately, they’re not going to say, “sure, I’ll take the chance!”
Brian: So but even if so, if you have bad credit, would a bank and let’s say you lined up a cosigner with excellent credit, would a bank lend to you?
Deni: It depends like if we’re talking like low 500 for three, probably not. You know, but if you’re on the, you know, middle ground like between five and six, possibly, Yes.
Brian: Okay. All right. So now what’s aside from the cosigner just doing this because they love you, You know, because your parent or your spouse or something. Why would a cosigner do this for you?
Deni: Well, I mean, you don’t have any financial investment. There’s no payment. Hopefully, you don’t have to deal with the day to day management of anything. And if the payments are made on time, it actually has a positive effect on your credit.
Brian: For conventional mortgages that report on your credit, not for portfolio lenders who don’t.
Deni: No, no, no, no, no, no.
Brian: Right. Okay. Well, that all makes sense. And who is the ideal borrower to do this with? Like when did someone say, “You know what? I probably need to bring in a cosigner here to help me?”
Deni: I think if you’re close, you know, I mean, like, if you have your mortgage process or whoever says, look, you’re a little shy here on income, your credit’s a little iffy, but we might be able to push this through with a cosigner under those circumstances. It’s not a bad idea. And, you know, you could refinance later on your own. Once payments are made on time and your situation changes. So it could also be a temporary situation. I know people that have done that. But yeah, for the most part and again, it’s great for the one somebody that wants to get involved early because let’s face it, when you’re young, you have either school loans and you’re just not you know, you’re not in the position as some other people might be. So it’s a good way to still be able to invest in real estate, get a portfolio started and get, you know, get it going.
Brian: Yeah. So that’s how I’ve seen people use Cosigners in the past to get started with real estate investing. You know, typically younger borrowers, people in their twenties, maybe their thirties either don’t have much credit yet or maybe they’ve made some mistakes with their credit, but they have parents who are willing to take the risk with them and cosign the loan on their behalf. Maybe an older sibling who’s willing to do that on their behalf. It’s also great for house hacking. People who are looking to buy, say, a multifamily property, move into one unit, rent out the other units. One of the advantages to doing that is that you can use the future rents from the other units to help you qualify on income, but sometimes that still isn’t quite enough to get you over the hump on your debt to income ratio. So you can use a cosigner to. Help with that to help you qualify on income to house a multifamily property. So I’ve seen people use Cosigners successfully there as well.
Deni: And that’s probably one of the most popular scenarios for this. But obviously there are others as well, and it’s good to know that a lot of your loan processors and whatnot, they’re going to want to know the relationship. So it’s not like you’re going to just, you know, call some whatever, you know, maybe have a side deal or something with them or whatever. And and then they can cosign for a lot of banks are very tough on that. There would have to be some type of an existing relationship.
Brian: So restricted to family members. Or can friends cosign for you I mean how does that work?
Deni: I think depending again, on the lender and underwriters, processors, whatnot, it could probably be a friend, but you probably would have to maybe exhibit to them where this relationship started and and all of that.
Brian: Yeah. And sometimes mortgage lenders will require a letter of certification from people like Cosigners. If someone gives you a gift to help you with your down payment, they’ll require a letter certifying that it is a gift that doesn’t have to be repaid. It’s not a loan. So yeah, to your point, sometimes lenders do want to get a letter from people who are involved in your loan, you know, just sort of lying on paper what the relationship is with the expectations are from the cosigner and so forth.
Deni: Yeah, It’s not like you’re going to go out and buy a 30 unit multi-unit building on your first try and then try it with a cosigner. So we’re looking when you’re first getting in, not that it couldn’t happen that way, but chances are not. Yeah but it’s a great way to knock down those barriers that might ordinarily prevent you from getting getting involved.
Brian: Yeah, because, you know, it’s something that you and I talk about all the time. There are some barriers to entry with real estate investing, you know, from the down payment to credit requirements, income requirements. So, you know, like you said, using a cosigner is a great way to get over that hump and break through that barrier to entry for new investors. By the way, we did add a link in the comments to where you can compare lenders who specialize in working with real estate investors. You can compare some some terms, their loan terms. Deni, Is there anything else that people need to know about borrowing money with a cosigner to buy investment properties?
Deni: Well, just make sure that you know that if something happens and you have a close relationship with this person, it could potentially, you know, mess that up as well. So you want to make sure if.
Brian: You default on your payments, any other person gets stuck holding the bag? Pretty much.
Deni: Pretty much, Yeah. You know, that’s pretty tough. So you want to make sure that the relationship is strong and that you are committed to the process.
Brian: Absolutely. All right. That’s all for today. Quick, simple. You know, great way to get started, though, with real estate investing. So on that note, we will see you guys next week. Stay in touch. Let us know what you want to hear about support at Spark Rental dot com. Deni and I read all those emails and we will catch you on the flip side.
Deni: Absolutely. Have a great day, guys!