To Cosign or Not to Cosign

Two years ago, cosigned mortgage loans were rarities. These days, though, cash-strapped and credit-challenged home buyers are turning to cosigners, usually relatives willing to vouch for the mortgage payment in order to seal the deal with a lender.

A cosigner can bring the debt-to-income ratio within a lender's guidelines or increase the amount that can be borrowed. "It's a great benefit," says mortgage broker George Hanzimanolis, at Bankers First Mortgage outside Philadelphia, "but there are definite pitfalls."

The benefit for Destiny Borrelli's family is clear: Dad's signature not only helped get the mortgage on their home in Clifton Heights, Pa., approved, but it also got her a lower rate. The arrangement is working for Borrelli and her father, John Dukes. "I have no trouble making the payments," she says.

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The pitfalls? Cosigners are on the hook for the payment if the mortgage holder doesn't make it. Plus, as a cosigner, your borrowing power is reduced because the mortgage obligation is on your credit report. If you choose to cosign, have an understanding -- in writing -- about when the borrower will refinance and remove you from the loan.

Meanwhile, monitor the payment history to make sure that the mortgage holder is building good credit (so he or she will be able to refinance) and that you're not at risk. Insist on a reserve account, with two to three months' worth of payments, that requires both signatures for a withdrawal.

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.