Before agreeing to co-sign on a mortgage for a family member or close friend, it helps to weigh the advantages. Altruism can be its own reward, helping your child or struggling pal to get a home. But that may be the only advantage for a co-signer when balanced against the potential liabilities and shared financial hardships. If you can buy the property for a loved one outright, it's probably better to get your own mortgage. Here are three key considerations to mull over before cosigning a mortgage:
1. Can You Afford Making Payments if the Borrower Cannot?
First it helps to distinguish the difference between a "co-borrower" and "co-signer". Anyone agreeing to be a co-signer on a mortgage takes on all the legal responsibility and potential consequences as the borrower – without the equity in the home gained from being a co-borrower. According to the Federal Trade Commission, the co-signer inks an agreement to:
- guarantee the debt
- pay the full amount if the borrower does not pay.
It is wise for co-signers to negotiate with the lender ahead of time to receive a statement of notifications of pending defaults or missed monthly payments and a schedule for repaying missed amounts without having to repay the entire amount immediately. However if, as the FTC reports, some 75 percent of co-signers end up making loan payments, it's crucial as a co-signer to know you may be responsible for making payments for part – or all – of the remaining term.
2. Can You Afford the Consequences if the Loan Goes into Default?
A worst-case scenario can involve a young person with limited earning power defaulting on mortgage payments, despite their best intentions. Once the non-payments become record, the co-signer may find themselves disqualified from options such as refinances or federal mortgage assistance. A creditor can seize not only the young person's home, but also the co-signer's assets like cars and jewelry. According to the FTC, if the co-signer cannot assume mortgage (principal, interest and delinquency) payments, they can be sued and have their credit rating decimated. If the property goes into foreclosure or must be sold for less than the outstanding mortgage balance, the lender will definitely send a request for the money.
3. Can You Afford Credit Repercussions Now or in the Future?
When the borrower misses a payment and takes a serious hit on their credit, the co-signer's credit report is amended with the same negative information. With the added debt and damaged report, the co-signer suddenly discovers that they're out of reach for a prime-rate loan for another mortgage or big-ticket purchase like a new car. In brief, the sinking of the borrower's dream house takes the co-signer along to the bottom of the sea.
This is not to say that all family members or friends who receive help from a co-signer to put them in range of mortgage qualifications turns out to lose their home. In fact, some move on to higher earnings, refinance the house by themselves at a better rate, or sell the property releasing their benefactors from all obligations. The three questions demonstrate the need for absolute care in evaluating pleas for help. Taking a class in how to turn down the requests of friends and loved ones that could result in personal disaster would be a prudent investment.