The key differences between mortgage co-signers and gifted down payments

Are you thinking about co-signing on a mortgage, or providing a gifted down payment for a family member? These are both significant actions that can provide a huge benefit to home buyers in the market. However, it’s important to fully consider what each of these terms mean before deciding to act. From there, you can decide which route is best for you and the buyer you are trying to help. Here’s what you need to know!

What is a mortgage co-signer?

First, let’s define what a mortgage co-signer is. This is a person who agrees to sign onto the mortgage alongside the primary home owner. In doing so, they are taking on the responsibility of paying off the mortgage, and are committed to repaying the mortgage if the primary borrower is unable to. This means that as a co-signer, you are on the hook for the mortgage, even though you may not live in the home. If the home owner defaults on their mortgage, their lender will turn to you for payment. A mortgage co-signer serves as extra support for the primary borrower, and they can help boost their application. Lenders who have some doubts about a borrower may be more likely to grant them a mortgage if they have a co-signer on board with a strong financial history and credit score. Lenders want to know they will receive timely payments, and adding an extra person to the mortgage can help provide this reassurance. .

What is a gifted down payment?

A gifted down payment is just what it sounds like! This is money given to a home buyer to use as their down payment. Down payments can be tens of thousands of dollars, which can be hard to save and can prevent many people from entering the market. Gifting a down payment can significantly reduce the financial burden on the home buyer. It helps them enter the housing market sooner, and potentially qualify for a mortgage that they might otherwise be unable to receive. The person who gifts the down payment is not attached to the mortgage in the way a co-signer is. They are only providing the down payment funds, and they have no further involvement or responsibility.

Gifted down payments have specific rules attached to them to ensure they are safe and legitimate. First, the gift must not be a loan, which means the gifter cannot expect repayment. This is because lenders do not want to finance a mortgage for a borrower who is in debt to another person, and therefore has another major financial priority. Second, gifted down payments must come from an immediate relative, such as a parent, sibling, or grandparent. This means you must have someone in your family who can provide this gift if you hope to benefit from it.

Which one do lenders prefer?

In general, lenders lean towards co-signers over gifted down payments. Lenders view a co-signer as an additional layer of security. A co-signer reduces a lender’s risk, because it means there are two parties responsible for repaying the mortgage. If the primary home owner is unable to make their payments, the lender can turn to the co-signer. If the co-signer has a very strong financial background, this is an extra bonus for the lender. On the other hand, a gifted down payment will only support the home owner with this upfront cost. The remaining mortgage payments are solely the responsibility of the home owner. If they have trouble making future mortgage payments, the lender does not have another party to turn to.

However, gifted down payments can still be very useful and valuable! For the borrower, it provides a huge boost and allows them to enter the market sooner. For a lender, it means the home owner can fully prioritize their mortgage payments. Since they did not have to shell out hundreds of thousands of dollars on a down payment, it is safe to assume the home owner is in a financially stable position to make their mortgage payments. Plus, gifted down payments are generally a bit simpler to work with. Since the lender does not need to fully evaluate this person’s creditworthiness, it takes less time and effort to introduce a gifted down payment than a mortgage co-signer.

If you are thinking about giving or receiving a gifted down payment, or accepting or acting as a co-signer, it’s important to understand the risks and commitment involved. There are certain rules and regulations you must follow, and it’s essential to be clear with your mortgage broker and lender about your plans. Before you jump into the world of down payments and co-signing, we recommend reaching out to your broker! We can ensure you are in the right position to take on these roles, and that you are fully aware of the risks and benefits involved.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can contact us at (902) 482-2770 or contact us here.