Young, Self-employed, and Trying to Buy a Home: Part Four (Cosigning, Refinancing, Equity)
Throughout this home buying series, we've discussed why we're interested in buying a home, costs and saving tips for a down payment, and filing self-employed taxes. All of this being done through the lens of recent post college grads who don't make a *ton* of money and work nontraditional jobs. In this post, we'll be going over cosigning, refinancing, and equity - all of which are kinda of unrelated but also kind of related.
Disclaimer: we're obvi not financial advisors, these posts are only intended to give you a basic dumbed-down understanding of the home buying process and to break down the shrouded mystery of the buzz words that surround it. Do as much research as possible, hopefully using these posts as one of many tools in your tool box for tackling home buying! Follow us on Instagram to keep up with our home buying *adventure*.
Cosigning is when two individuals sign on for a bank loan together, meaning they are both responsible for the monthly mortgage getting paid. It's pretty much the best fall back for anyone who won't qualify for a loan on their own and is fortunate to have someone in their lives (family friend, parent, sibling, etc) that has resources, good credit, and a willingness to help you. It's a pretty serious ordeal, and whoever is cosigning for you is basically agreeing to have their lives ruined if you mess up, so keep that in mind. There are a ton of reasons to use a cosigner, but to fit into our dynamics (young, self-employed, etc) you may need a cosigner if you have been self-employed for less than two years or have irregular or low income, or if your credit isn't up to par. We won't get into credit requirements here as they vary so much from lender to lender, with some conservative lenders setting 700 as the lowest threshold and with other programs allowing down into the mid/upper 500s. If you're dealing with low credit, shop around until you find someone who is willing to work with you, because there are definitely options out there.
And we're only two paragraphs in to this, but if you need a drink, may we suggest: Peach & Serrano Margaritas
Cosigning is a great option for folks who, like us, have been able to pay our credit cards and exorbitant monthly rent for many years (rent that is almost double what our mortgage payment would be!) but don't necessarily look the most desirable on paper given our non-traditional employment and short credit life (around 5 years). It's probably not the best option for you if you're actually just struggling to pay rent or can't keep up with credit card payments, in which case you'll likely just want to wait until you've got the income to take care of your essentials before looking into home ownership.
Securing a cosigner is going to be a very individual and personal experience for everyone, but typically you'll be working with someone very close to you that trusts your ability to make monthly payments. Basically if you don't do it, they'll have to do it, and if no one does it then the house goes into foreclosure and both of your credit scores get completely fucked. Not a cute look, and it'll make buying a home again in the future much more difficult.
Qualities to look for when selecting a cosigner: ability to pay (they've got a good income:debt ratio), stability (good, steady income job), strong credit (they've got a credit life of more than 6 years and a credit score around / over 720) and willingness to pay (they aren't going to let the sink ship if you can't make payments). None of these are hard and fast rules, especially that credit score, but they're good guidelines to keep in mind when trying to figure out who you want to ask to cosign for you.
We'd recommend first discussing this option with the individual you think may be able to help you, and then approaching your loan agent or advisor with this person and working together to figure out the best options and next steps. Typically, if they think this person is a good fit for a cosigner, they'll then run a full credit pull (fancy word for report) for both of you and start the process of pre-approval for a set amount of money. Credit pulls and assessments do lower your credit score a tiny bit, so make sure you've found someone you are confident will be a good match - see above criteria - before approaching your loan officer.
If the prospect of having your parent or sibling or family friend on your home loan makes you uncomfortable or sounds like an annoyance (we all want that #independence), you'll have the option to refinance after two years and potentially become the sole name on the loan. Refinancing is basically just an assessment of your home after a couple years to see if an increase of home value can qualify you for a better interest rate or mortgage payment, and can be used as a formal assessment of your new income - compared to when you qualified for the home loan - to see if the bank will now be comfortable with you being the one solely responsible to make payments.
Your home value may be affected by increases in neighborhood value or by any repairs or renovations you do within those two years. If your home is valued at more then when you bought it, we're looking at equity.
In the most simple terms, equity is basically the percentage of the home that you own that the bank isn't using as collateral for your loan. If you buy a $300,000 home and put down 20%, you're starting out with $60,000 in equity. This is the amount of the home that is downright yours. If the home value doubled immediately (lmao, it won't), you'd have a home that is worth $600,000 but that you only owe roughly $240,000 on, giving you $360,000 in equity. That's $360,000 worth of home that is yours. Except that that would never happen so just take it for what it is, an optimistic example.
So, if after two years with your cosigner your home has increased a good bit in value, your equity alone may make you eligible to be the sole name on the loan even if your income hasn't changed dramatically. Keep in mind this will also be after two years of (hopefully) steady monthly payments, which will also act towards decreasing the amount of your loan and furthering you into equity. Equity and refinancing are two great things to keep in mind when considering your ability to be the sole name on a home loan - as hopefully after your first two years as an owner you will be able to qualify as the sole name in the loan.
That's all for this chapter - we'll be diving into more home buying goodness in the coming weeks and of course updating on how our own process is going! Follow along on Instagram, or sign up for our newsletter to never miss a post!