| Feature | Equitable Owner | Co-Signer |
|---|---|---|
| Appears on the home’s deed? | Maybe | No |
| Payment responsibility? | Yes | Only if the primary borrower is unable to make payments |
| Ownership rights to the home? | Yes | No |
What co-signing means
Homebuyers typically use a co-signer when they can’t qualify for a loan on their own. A parent may co-sign if their child’s debt-to-income ratio is too high to qualify for a mortgage on their own. Co-signing may also be necessary if the child’s income is too low to meet the lender’s requirements.
Credit implications
Although the co-signer doesn’t have an immediate payment responsibility for the mortgage, they serve as a backup if the primary borrower can’t make payments. If the primary borrower defaults and the co-signer is unable to step in and make the payments, the co-signer’s credit may be negatively impacted. Keep in mind that the co-signer’s credit can be affected even if the primary borrower makes on-time payments. The full mortgage balance is added to the co-signer’s credit profile, which can raise their debt-to-income ratio.
Who can deduct when parent co-signs but child pays (and vice versa)
To deduct, the person must prove they paid mortgage interest on a home that is their primary or secondary residence. They must also prove equitable ownership. If a parent co-signs but a child pays, has equitable ownership, and considers the home a primary or secondary residence, the child can deduct mortgage interest. If a child co-signs but a parent pays, has equitable ownership, and considers the home a primary or secondary residence, the parent can deduct mortgage interest.
Mortgage interest deduction basics
You can typically deduct mortgage interest from loans that finance your personal residence. However, the deduction is limited to the first $750,000 of the loan; that amount drops to $375,000 if you are married and filing separately. If your mortgage debt was incurred before December 16, 2017, you can deduct up to $1 million or $500,000 if married and filing separately.
What is Form 1098?
Lenders are typically required to file Form 1098 with the IRS to report interest income on mortgages they provide. They then furnish the payer or payers of record with a statement. Note that filing this form is only necessary if the borrower paid $600 or more in mortgage interest on a single mortgage. If a person’s name is on Form 1098 but they didn’t pay the mortgage interest, they can’t claim the deduction. If someone’s name is not on this form, they can deduct mortgage interest only if they have a paper trail showing they actually paid it. If Form 1098 has multiple names and multiple people are paying the mortgage interest, each party can deduct their portion of interest paid.
