Cosigning a student loan can affect the cosigner’s ability to qualify for a new mortgage or to refinance a current mortgage. As a cosigner, you could face higher interest rates or be denied a mortgage altogether. Although it might seem stressful at first, there are financial moves you can make that could help you get or refinance a mortgage.
But, the student loan isn’t really your loan!
Cosigning for a student loan can impact your credit, even though you might argue that the debt isn’t actually yours. From a lender’s perspective, however, a cosigned loan is still money that you’re liable for, which could make you a less attractive borrower. Your debt-to-income ratio will be higher with the cosigned loan and the borrower’s late payments will show up on your credit history.
What do you do? First, don’t panic.
It might take some planning, but you do have options. Here’s how you can get or refinance a mortgage as a student loan cosigner.
How to get a mortgage as a student loan cosigner
There are several steps that can help a student loan cosigner to get or refinance a mortgage.
- Apply for cosigner release. Qualifying for cosigner release on a student loan isn’t easy to do, but it is an option worth pursuing. Essentially, the student has to prove they are capable of making timely payments on their own for at least a year (in some cases, two, three or four years) before the cosigner can possibly qualify to be released. They also need good credit and have to be able to meet the lender’s income requirements. Your lender should have a form available to apply for a cosigner release.
- Refinance the student loan without a cosigner. If the student qualifies for a better interest rate on a new loan, without a cosigner, they could refinance the cosigned student loan. Using this strategy, the new loan will pay off the original loan you cosigned. This option might help the student repay their loan faster, if they’re able to qualify for a lower interest rate. Generally, it takes a few years after graduation before the student can qualify for a better interest rate, if they manage their credit responsibly and have a good job. If you do decide to refinance the current student loan, shop around and compare rates so your student gets the best terms possible. (Parents can also transfer a Federal Parent PLUS loan into the student’s name by refinancing it into a private loan, but will lose the superior repayment benefits available on federal education loans. These include income-driven repayment options, potential for loan forgiveness, generous deferment options, a death or disability discharge, and more.)
- Reduce monthly payments on the student loan. When you’re applying for a new mortgage or refinancing a current one, the lender is going to be primarily concerned with the debt-to-income ratio. The debt-to-income ratio is the percentage of your monthly income that is devoted to repaying debt, including the cosigned loan. If the debt-to-income ratio is too high, you’re less likely to qualify for a mortgage.
One option is to try reducing your monthly loan payments by increasing the term of the loan or by taking advantage of an income-driven repayment plan. Increasing the loan’s term could mean more interest will be paid over the life of the loan. However, the monthly payments will be smaller, allowing you to qualify for a mortgage because less of your monthly income will be allocated toward student loan repayment.
- Pay off smaller loans or credit cards first. Another way to change your debt-to-income ratio is to reduce some of your other debt. Do you have any credit cards with small balances that you can focus on paying off before you try to qualify for a mortgage? Knocking out some of the smaller debt could improve your credit and prepare you to take on more financial responsibility in the eyes of a lender.
- Increase income with a second job. Taking on a second job can reduce your debt-to-income ratio by increasing your income. You can also ask your employer for a raise. A lender will put most weight on the income from your primary job. However, income from a second job could help if you’ve demonstrated the ability to work two jobs simultaneously in the past and you don’t have a job gap of more than 30 days within the past 24 months.
- Shop around for flexible lenders. Some lenders will be less risk-averse than others, so shop around. You might find a lender who is willing to help you with a mortgage despite the student loan debt. Consider credit unions and community banks, who tend to be more flexible than big box lenders. This is why it’s important to compare several lenders before you make a decision. Shopping around will not hurt your credit score.
Find a solution that works for you
It’s frustrating to think your credit could be penalized for trying to help a child go to college by cosigning their student loans. Even if this happens to you, there are workarounds to help you achieve your financial goals. Carefully assess each option and talk with your student about what might work for them. It might take some research and compromise, but in the end, you’ll likely be able to make it work.