FIVE CRUCIAL QUESTIONS TO ASK BEFORE YOU CO-SIGN A MORTGAGE
By Jessica Hudson | December 1, 2019
If you're considering co-signing a mortgage- say, to help your grown kids buy their first house- it's wise to take a step back and consider whether this move makes sense. Sure, you're helping a loved one purchase property, but this type of arrangement could also pose a risk to your own finances, not to mention your relationship with the co-signee. So, before you put your John Hancock on the line, ask yourself these five key questions first.
1) What is co-signing, exactly?
When a home buyer uses a co-signer who does not intend to live in the property, the primary borrower becomes what's known as the "occupying borrower" and the co-signer becomes what's known as the "non-occupying co-borrower". 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. Meaning, that if the occupying borrower defaults on the loan, the co-signer is responsible for coming up with the money. Co-signers go through the same qualification process as occupying borrowers, so it will generally only help the primary borrower if the co-signer's income, credit, etc. is better than theirs.
2) What are my responsibilities when co-signing a loan?
You are equally responsible for the mortgage payments. If the occupying borrower fails to make a mortgage payment, that late can go on your credit report, potentially damaging your credit score significantly. Another thing to consider: when you co-sign a mortgage, you're adding that mortgage liability to your debt total, reducing your own borrowing power.
3) What are the risks of co-signing?
In addition to the above-mentioned FICO score risk, you could also be on the hook for the entire loan balance. When you co-sign a financial product, whether it be a mortgage, a car loan, or a credit card, you could get burned. If the occupying borrower completely fails to pay the mortgage, you will need to make the payments or risk a foreclosure, further damaging your credit and inhibiting your future purchasing power.
4) How do I mitigate my risks?
The good news? There are several safeguards you can put in place to protect yourself as a co-signer. First, make sure your name is put on the title of the home. That way, if the primary borrower can't pay the mortgage, you have the power to sell the property. Second, take steps to monitor your co-borrower's mortgage payments. You can do this by setting up e-mail and text alerts to let you know when mortgage payments are posted. This offers a nice protection, since every home loan agreement offers borrowers a grace period for late payments. Typically, there is a 15-day grace period, in which case you would have 14 days after the payment is due to help your co-signee pay the bill without incurring a late fee or taking a hit on your credit report.
5) 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 the mortgage payments. Past behavior is a good predictor of future behavior. If the person has trouble making credit card payments or has a pattern of not meeting other financial obligations, he or she may not be responsible enough to be taking on a mortgage, especially one that has your name attached to it.
The bottom line: Co-signing a mortgage is serious business. 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.