How can I qualify for a mortgage refinance if I cosigned my son's private student loans?
My application to refinance my home mortgage was denied because I previously cosigned a private student loan for my son. Is there anything I can do to qualify for a refinance despite this? I thought the private student loan was my son’s loan, not mine.
When a mortgage lender evaluates a homeowner’s eligibility to refinance a mortgage, the lender considers all debts for which the homeowner is responsible. This includes cosigned loans, such as a cosigned private student loan. A cosigner is a co-borrower, equally obligated to repay the debt. The cosigned loan shows up on the credit history of the cosigner, not just the primary borrower. Delinquencies and defaults will damage the credit scores of both the borrower and cosigner.
This is a common misconception of cosigners. Many cosigners think that they are merely enabling the borrower to get a loan and that cosigning makes them some kind of contingent borrower or guarantor but not really obligated to repay the debt. The reality is that a cosigner is treated the same as a borrower. The cosigner is jointly and separately obligated for the full amount of the cosigned debt. The lender seeks initial repayment from the borrower as a courtesy, not because of any legal requirements. As soon as the borrower is late with a payment, the lender will start sending statements and demanding payment from the cosigner.
So, a cosigned private student loan can affect a homeowner’s ability to refinance a mortgage or obtain a home equity loan or line of credit (HELOC). Even if the cosigned loan doesn’t cause the loan application to be denied, it can result in a higher interest rate.
There are several workarounds that may help a homeowner qualify for a mortgage, home equity loan or HELOC.
Reduce monthly payments through an alternate repayment plan. Credit underwriting for a mortgage focuses more on the monthly payment burden than on the total amount of debt. How much of the homeowner’s monthly cash flow might be required to repay the cosigned private student loan? So, one solution is to reduce the monthly payment on the cosigned loan by increasing the term of the loan. Even though increasing the term of the loan increases the total interest paid over the life of the loan, it reduces the monthly payment amount. This, then, reduces the percentage of gross income that is devoted to repaying all debts.
A similar scenario occurs when a borrower has a federal student loan. Using the income-based repayment plan reduces the monthly payment, as compared with the standard 10-year repayment plan. So, even though income-based repayment is intended to be a safety net for borrowers who are struggling to repay their federal student loans, it could help borrowers qualify for a mortgage.
Cosigner release. Some private student loan programs offer a cosigner release option. This removes the cosigner from the loan after the primary borrower makes a number of full consecutive on-time monthly payments, typically 12-48. Often, the primary borrower must also satisfy credit criteria. Some borrowers have said that it is difficult to qualify for cosigner release in practice. But, if the cosigner is removed from the loan, the loan will no longer show up on the cosigner’s credit history, reducing the cosigner’s debt-service-to-income ratio.
Refinance the private student loans without a cosigner. If the lender does not offer a cosigner release option or if the borrower does not qualify, the borrower could apply for a private consolidation loan without a cosigner. The new loan pays off the cosigned loans, effectively removing the cosigner from responsibility for the borrower’s private student loans. Unfortunately, credit underwriting criteria for refinancing a private student loan may be more stringent than credit criteria for the original loan, since lenders do not want to refinance the private loans of borrowers who are struggling to repay their loans.
Increase income. If the borrower increases his or her income with a second job in the evenings and weekends, it may reduce the debt-service-to-income ratio enough to enable the borrower to qualify for the mortgage refinance, even if the borrower does not intend to keep the second job long-term.
Borrowers should also call the mortgage lender to ask for options to enable the borrower to qualify for a mortgage refinance. Some lenders can be flexible and find creative ways to help the borrower qualify, considering that a refinance will improve the borrower’s ability to repay the debt.