Keith Gumbinger
Keith Gumbinger is vice president of HSH.com, a mortgage information and research website.HSH.com
Co-signing on a mortgage might seem like a way to help a family member buy a home in this difficult market. But many parents who co-sign on their adult child’s mortgage regret that decision. The risks…
• If the borrower is late with payments, the co-signer’s credit score will suffer.
• If the borrower stops making payments, the lender likely will demand that the co-signer make those payments.
The co-signer could end up having to cover the entire mortgage—even though he/she has no control over the property nor any equity stake in it. This risk can last for the entire length of the loan, which could be 30 years.
Before co-signing, consider…
Whether this loved one is financially responsible. Does he/she have a long track record of responsible behavior and reliable income? If the answer is anything less than a definitive yes, do not co-sign unless you would be willing to cover the cost of the mortgage if necessary. Lower-risk alternative: Gift your child money for the down payment.
Why this loved one requires a cosigner to get a mortgage. Be wary if the answer is, “He has a poor credit score,” or “She is buying a more expensive home than is appropriate for her income.” The risk for default is high—that’s why lenders would be unwilling to offer this borrower a loan without a co-signer. Caveat: You might consider co-signing if this loved one would qualify for the mortgage in normal times and is having trouble only because of today’s high interest rates. Explain to the borrower that you expect him to refinance when rates drop to some preselected level.
Whether you might need a loan in coming years. Co-signing will increase your debt-to-income ratio even if you never make any payments on the borrower’s behalf. That’s likely to limit your ability to qualify for loans and increase the rates of loans offered to you.
Whether you could live with the relationship consequences if your loved one failed to pay his mortgage after you co-signed. This damage can be as painful as the financial damage.
How you can monitor the loan if you co-signed. Insist on receiving mortgage statements from the lender and/ or access to the account online so you can confirm loan payments are being made.
