If you’re considering co-signing a mortgage - say, to help your grown children buy their first house - it’s smart to take a step back and consider whether this move makes sense for your financial situation! Even though it’s a kind thing to do, helping a loved one purchase property could pose a risk to your own finances. Before moving forward, ask yourself these key questions:
What is a co-signer?
When a homebuyer uses a co-signer, the buyer becomes the “occupying borrower,” a.k.a. the person who is going to live in the house. Meanwhile, the co-signer is someone who typically doesn’t live at the property.
Co-signers physically sign the mortgage or deed of trust in order to add the security of their income and credit history against the loan. In turn, both parties take on the financial risk of the mortgage together. This means that if the occupying borrower defaults on the loan, the co-signer is expected to come through with all the cash.
How can I qualify as a co-signer?
To qualify as a co-signer, you must have a strong credit history and good income. Co-signers get checked just as ordinary borrowers do. They will have their income, credit history, credit score, assets, and debts reviewed by one of our local lenders.
What are my responsibilities as a co-signer?
If anything affects the occupying borrower’s financial health, like losing a job or severe medical problems, the co-signer would be responsible for the mortgage payments.
Also, if the occupying borrower misses a mortgage payment, that hiccup can go on your credit report, which could potentially damage your credit score significantly.
One more thing to consider: when you co-sign a mortgage, you’re adding that person’s debt to your own, reducing your own borrowing power. This means that your chance of getting a loan yourself down the line could be in jeopardy.
What are the risks of co-signing?
When you co-sign a financial product, whether it be a mortgage, a car loan, or a credit card, you could get burned.
A 2016 CreditCards.com survey of 2,003 U.S. adults showed 38% of co-signers had to pay a part of or the entire loan because the primary borrower failed to do so. 28% indicated they suffered a drop in their credit score because the occupying borrower paid late or not at all.
How do I mitigate my risks?
Good news, if you are co-sienging, there are several safety measures you can put in place to protect yourself.
First, make sure your name is put on the title of the home. That way, if your borrower can’t pay the mortgage, you have the ability to sell the property.
Second, take necessary steps to monitor your co-borrower’s mortgage payments. You can do this by setting up email and text alerts to let you know when mortgage payments are due. You can also ask the mortgage lender to notify you if the borrower misses a mortgage payment.
Regardless, make sure you establish clear lines of communication between you and the occupying borrower. They need to know how to contact you if they have a problem with the mortgage.
Most importantly, do I trust the borrower?
Before offering to become someone’s co-signer, ask yourself whether you truly trust the other person to be financially responsible for making mortgage payments.
If the future occupying borrower has had trouble making credit card payments or has a pattern of not meeting other financial obligations, they may not be responsible enough to be taking on a mortgage, especially one that has your name on it.
Co-signing a mortgage is a serious undertaking. You’re not just putting your name on a piece of paper - you’re putting your own finances, including your debt obligation and your credit score, at risk. Be cautious before moving forward and feel free to reach out to one of our local lenders to go over all your financial options.