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The possible impact of co-signing

By: Kari McCoy
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Question:

Dear Kari,

My daughter and son-in-law have asked me to co-sign on a loan so they can buy their first home. The way it was described to me makes the process sound so easy. They have assured me that I would not have to make any payments not even one penny. I would appreciate any incites you might have on this matter so that I can give an informed yes or no. 

 

Answer:

Many parents co-sign for their children to help them obtain their first home. The need for a co-signer takes place when a lender feels that the applicants are not a good risk or there is too much uncertainty of a risk to qualify for a mortgage on their own. This could be as simple as the lack of credit or the lack of job history just to name a couple. Having a qualified co-signer makes the lender feel more confident in giving the mortgage as it reduces the risk of default on the mortgage. Essentially the aid of a co-signer can strengthen the deal so that the lender can say yes instead of a flat-out no.

Crucial information for co-signers to know: The co-signer and the primary mortgage applicant have committed equal responsibility for the full repayment of the loan. However, cosigners do not hold ownership interest in the property. Lenders are not required to inform the co-signer about any late payments on the account. Typically, the co-signer is only contacted by the mortgage company when the primary borrower is in danger of defaulting on the loan.

As a co-signer there will be impacts on your credit even if the primary borrower makes every payment on time. This is because the monthly mortgage payments will count as a personal obligation of the co-signer. In addition, this will reduce the amount of credit available for the co-signer. In other words, if the co-signer went to purchase a home for themselves, they might not qualify because they already have a mortgage on an existing home. In order to do so they would have to prove they could not only qualify for their new home, but they would also have to qualify for both homes in order to purchase the new home. An additional key factor is in the event of a foreclosure it will appear on the co-borrower's credit also. 

If you're considering taking the position of co-signing you would be wise to do a little investigating to satisfy yourself with the following: Are the primary borrowers reliable, do they know how to handle money, do they have secure jobs and why do they need a co-signer in the first place? Another question would be are you confident they will keep up with the payments, taxes, insurance and maintenance of the home?

Although co-signers cannot take themselves off the loan, once the primary borrowers have a at least two years of good standing history of making all payments on time, this might be the ideal time to have the home refinanced which then will release the co-signer from all their current obligations on the home.

An alternative approach that some folks are working with is providing gift funds to their children. The gift funds may be used towards the down payment or paying closing costs. It can also be used for paying off large debts such as a car loans, credit cards, student loans, etc. This has been known to satisfy some lenders so that there would be no need for a co-signer as they will then qualify on their own merits (each loan circumstance being different). Becoming a co-signer is an extraordinary gift as not all people are fortunate enough to have the opportunity to do so. When all is said and done, it can be a rewarding experience to help someone with such a large financial decision such as buying a home.

Kari McCoy owns the Kari McCoy Group, Residential Real Estate at Lyon Real Estate. She can be reached at 916-933-5274 or sold@karimccoygroup.com.  #00841588