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The real deal with co-signing a mortgage

By: Art Garcia
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Question:

Dear Kari,

My granddaughter has asked me to co-sign on a loan so she can buy her first home. I have always been a homeowner myself; it would bring me joy to see her in a nice home of her own. The way it was described to me makes the process sound so easy, and I would not have to ever make any loan payments. I would like to know, what is the big deal about me helping out by co-signing? I would appreciate your incite on this topic. 


Answer:

Many parents co-sign for their children to help them obtain their first home. The real estate market is experiencing this practice more as lenders tighten their guidelines along with their qualification belts. The need for a co-signer takes place when a lender feels that the applicant is not a good risk or is too uncertain 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 blatant 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 when the primary borrower is in danger of defaulting on the loan. In the event of a foreclosure it will appear on the co-borrower's credit also. As a co-signer there will be impacts on your credit even if the primary borrower makes every payment on time, since the monthly mortgage payments will count as a personal obligation of the co-signer. This will reduce the amount of credit available for the co-signer.

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:  Is the primary borrower 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?

Although co-signers cannot take themselves off the loan, once the primary borrowers have a two year good standing history this would then be the ideal time to refinance and release the co-signer from their obligation.

In the event you decide to co-sign for your daughter and son-in-law, please know that your husband can protect himself by signing a quit claim deed up-front at the title company. This way he will not be liable as he stepped out free and clear from any negative or positive outcome.

A different approach that some folks are working with is providing gift funds to their children. The gift funds can be used towards the down payment, paying closing costs or paying off a large debt such as a car loan. This has been known to satisfy some lenders hence forth there is no need for a co-signer as they will then qualify on their own merits.

Becoming a co-signer is an extraordinary gift to help your child into homeownership. Keep in mind that you would get all the credit in your child's eyes while not costing you a penny. Owning a house is a wonderful privilege.

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