A home equity loan with a cosigner may help increase your chances of getting a home equity loan compared to applying on your own.
Life is unpredictable. Unexpected things pop up that may require you to make significant financial decisions, like whether or not a home equity loan with a cosigner is right for you.
Understanding what a home equity loan is, your and the cosigner’s roles, and what the application and repayment processes involve allow you to make an informed decision about your life and financial future.
At RenoFi, we aim to help homeowners understand their borrowing options. This guide will answer some of the most important questions you may have regarding getting a home equity loan with a cosigner, what you should consider, and what to expect throughout the process.
What Is a Home Equity Loan?
Homeowners can use their home’s equity as collateral to obtain a home equity loan. It’s considered a second mortgage on your home.
It’s important to note that equity does not equal your home’s value. To determine your home’s equity, you take the home’s value and subtract what you owe on your mortgage. Consider the equity as money already paid into the home.
While you’re likely aware of many of the benefits – the biggest being that you get a lump sum of money to use for your desired purpose – there are risks involved. A home equity loan is also not free. It will likely come with a fixed interest rate and various fees. Home equity lenders are typically upfront about these amounts, so you can plan accordingly.
What Is the Role of a Cosigner?
A cosigner essentially shares the risk of the home equity loan with the applicant. If you, as the homeowner, don’t pay back the home equity loan as agreed, the cosigner is legally responsible.
Cosigning for a home equity loan can positively affect their credit report, but if you, as the homeowner, don’t stick to the terms of the loan with the cosigner, it can negatively impact their credit score. Your cosigned home equity loan shows up on both your and their credit reports.
What Can You Use the Home Equity Loan For?
A home equity loan can be used for just about anything, like building an emergency fund, doing renovations and updates to the home, or even starting a business. You receive the money as one lump sum rather than individual payments.
What Should You Use the Home Equity Loan For?
You can use the loan for any purpose, but as it’s a second mortgage on your home and will affect your credit and that of your cosigner, it’s advisable to use it for necessary, significant expenses and for an amount you can afford to pay back.
For example, getting the money to go on a shopping spree for expensive clothing items or even buying a vehicle might not be in your best financial interest. However, it may be advantageous to use the funds for a business opportunity or to pay down other debt.
Is Applying With a Cosigner Right For You?
The cosigner must make a big decision about whether to take on the responsibility of your debt, considering they have no control over how, when, and if you make your payments. Signing on the dotted line indicates that they trust you to stick to the repayment commitment.
However, you also have to decide if you’re willing to shoulder that burden in the first place. It’s one thing to carry the weight of debt, but it’s another to know you’re bringing someone else into it.
If you’re considering getting a home equity loan, chances are you need it for a significant reason. While combining your home equity loan with a cosigner may give you access to the funds you need, it’s vital to make sure you can stick to the repayment terms.
Benefits of RenoFi Loans
Before applying for a loan with a cosigner in order to get more funds, you should consider applying for a RenoFi loan which lets you borrow more money by borrowing against the future value of your property post-renovation, rather than borrowing against its current value.
Imagine this situation: Your home is valued at $500,000, with a mortgage balance of $400,000. You’re planning a renovation and anticipate the home’s value will increase to $640,000 afterward. Currently, your loan-to-value (LTV) ratio is 80%, meaning you can’t borrow any money for the renovation under typical lending rules.
A RenoFi loan changes this by allowing an LTV of up to 150% or 90% based on the after-renovation value.
So, while a standard home equity loan gives you no borrowing power, a RenoFi loan lets you access up to $176,000 by leveraging your home’s future value.
If you’re considering a home renovation and need a HELOC that gives you greater borrowing power, exploring RenoFi’s options might be the perfect solution for you.
Discussions With the Cosigner
A cosigner may jump at the chance to help you, but they need to know what they’re getting themselves into.
If they are not familiar with the process of getting a home equity loan, they should do their research before making any promises. They also need to fully understand their role as cosigners and how agreeing to be one can affect the current and future state of their credit reports.
You should also be upfront with your cosigner about how you plan to handle the repayment terms and explain why you’re asking them in the first place.
For example, let’s say you live in a remote area with no public transportation, and your truck is your only way to get to and from work. If you lose your truck, you lose your job or have to deal with the expense of a rental.
Your current credit score is okay but not great, and you feel using your current home equity would allow you to get a reliable, safe, like-new truck so you can get to where you need to go. The cosigner should know all of this. You may feel vulnerable asking for help and revealing significant, personal details, but many people (rightfully) need to know this information before making such a significant financial decision.
Considering the role they’re signing up for, the cosigner should also be a part of the decision-making process about which loan you’ll get and the lender you’ll work with. Additionally, whether you speak to the lender on the phone or in person or you apply online, the cosigner should be present in case they have any questions before they formally commit.
Tips for Evaluating Lenders
There’s a lot to think about when deciding on a home equity lender. The most important thing to consider is the lender’s reputation. It might be tempting to go with a name you’re unfamiliar with if they make a lot of promises, but it’s typically better to team up with a lender who has a great reputation and will be honest with you about your situation rather than giving you false hope or making unsubstantiated promises.
You should also look into who offers repayment terms, including the timeframe and interest rates, that you feel comfortable agreeing to should you qualify for the home equity loan.
One of the most vital things to pay attention to while doing your research is making sure the lender provides clear and concise loan terms that are easy to understand, such as with the RenoFi Home Equity Loan.
What Do Lenders Evaluate During the Application Process?
Be prepared for lenders to examine your and the cosigner’s financial lives. You’ll have to provide all the details about the purchase of your property, including how much you paid for it and when, as well as its approximate current value as of today.
Make sure you have information from every source of income you receive, which can range from job income to child support payments. Lenders will typically ask you to provide at least a year’s worth of income information for them to review.
Debts will also come into play. This includes what you owe on your mortgage, your car, and any credit cards. It’s essential to provide all the details that they requested.
Pros of Getting a Home Equity Loan With a Cosigner
The biggest benefit of qualifying for a home equity loan is that you can get the money you need for something important that can improve your life in some way. For instance, you can consolidate your debt, or you may be able to get the medical care you so desperately need.
There are also potential tax benefits, depending on what you use the money for. Get advice from an accountant before you apply for a loan. Another perk is that you may be able to boost your credit score as long as you make your payments on time and in full.
Bringing a cosigner into the mix may help your chances of getting the home equity loan. If they have great credit, a high income, little debt, and a history of making payments on time, this can work in your favor. You may even be able to secure a lower interest rate than if you applied on your own.
Cons of Getting a Home Equity Loan With a Cosigner
You’re taking on additional debt, which is the biggest disadvantage of getting a home equity loan, despite the reason you’re applying for the loan in the first place. It’s also a major risk, one that could potentially result in your home going into foreclosure if you don’t make the payments as agreed or your home’s value significantly decreases.
Having a home equity loan with a cosigner can be stressful since someone else is involved; what you do regarding that loan affects them. It’s important to note that personal relationships and money don’t always mix, and it may affect the relationship between you as the homeowner and them as the cosigner in ways you didn’t anticipate.
Is the Cosigner Permanently on the Home Equity Loan?
A cosigner doesn’t necessarily have to remain on the home equity loan throughout its duration. Many, but not all lenders, may allow the cosigner to be removed from the agreement. Before agreeing to cosign in the first place, it’s important for the cosigner and you, as the homeowner, to be aware of the terms. The lender may be able to reevaluate the situation at a later date.
What Could Disqualify Someone From Getting a Home Equity Loan?
In addition to your credit score, lenders also look at your debt-to-income (DTI) ratio when you apply for a loan. If you already have a fair amount of debt for your income, the lender may view a home equity loan as too much and too risky.
When to Reconsider Tapping Into Your Home Equity
Finally, while tapping into your home equity might be wise in some cases, it may not be the ideal solution for all scenarios. For example, it might not be a good idea to get a home equity loan to fund a vacation or wedding. These are non-appreciated expenses. Instead, make a budget for these events.
Purchasing a car with a home equity loan is another thing you may want to reconsider. If you have decent credit, you can qualify for an auto loan with a lower interest rate than you could find with a home equity loan. It also can take five years or more to pay back a car loan, while a home equity loan could span 20 to 30 years with a higher interest rate.
Considering getting a cosigner for a home equity loan can be overwhelming, but the resources and assistance available through RenoFi can make all the difference.
RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the After Renovation Value of your home. This allows you to borrow 11x more on average, get a low monthly payment, and keep your low rate on your first mortgage.
Browse the RenoFi website for more information about how you can start the journey of potentially acquiring a home equity loan that fits you and your cosigner’s circumstances. Contact RenoFi for any questions you have about the process.
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