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Risks to Consider Before Co-signing Your Kid’s Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Homeownership is a cornerstone of the American Dream for most, but many millennials are finding it difficult to afford to buy in.

Overall, millennials are still far behind in homeownership compared to previous generations were at their age. Only 39.1% of millennials lived in a home they owned in 2016 compared with 63.2% of Gen Xers, according to an analysis by Trulia Economist Felipe Chacón.

Student debt and stagnant incomes could share some of the blame. Millennials earn 78.2 cents for every dollar a Gen Xer earned at their age, Chacón found. Nearly half of millennial homebuyers report carrying student loan debt, according to the 2016 National Association of Realtors Home Buyer and Seller Generational Trends survey. They carry a median loan balance of $25,000.

Loan officers have to take a borrower’s total debt picture into account when running their application, and it’s become increasingly hard to qualify for a mortgage with a vast amount of student debt.

When they can’t get approved for a mortgage, it’s common for homebuyers to seek out a co-signer for their loan. Often, that person is a parent.

Co-signing a child’s mortgage loan is a serious decision, and parents should weigh all of the risks before making any promises. We asked financial experts what risks are worth worrying about to help clear out the noise.

1. You’re on the hook if your kid stops making mortgage payments

When you co-sign a loan, you agree to be responsible for payments if the primary borrower defaults. If you’re expecting to retire during the life of the mortgage loan, co-signing is an even larger risk, as you may be living on fixed income.

Dublin, Ohio-based certified financial planner Mark Beaver says he’d be wary of a parent co-signing a mortgage for their adult child. “If they need a co-signer, it likely means they cannot afford the house, otherwise the bank wouldn’t require the co-signer,” says Beaver.

By co-signing, you effectively take on a risk the bank doesn’t want. And the list of potential scenarios in which your child may no longer be able to afford their house payments can be vast.

“What if your daughter marries a jerk and they get divorced, or he/she starts a business and loses money, or doesn’t pay their taxes. The risk is ‘what can happen that can make this blow up,’” says Troy, Mich.- based lawyer and Certified Financial Planner, Leon LaBrecque.

Bottom line: If you wouldn’t be able to comfortably afford the payments in case that happens, don’t co-sign.

2. You’re putting your credit at risk

A default isn’t the only event that could negatively affect your finances. The mortgage will show up on your credit report, too, even if you haven’t taken over payments. So, if your child so much as misses one payment, your credit score could take a hit.

This may not be the end of the world for an older parent who doesn’t anticipate needing any new lines of credit in the future, Beaver says, but it’s still wise to be cautious.

You might think your child is ready to become a homeowner, but a closer look at their finances may reveal they aren’t yet that financially mature. Don’t be afraid to ask about their income and spending habits. You should have a good idea of how your child handles their own finances before you agree to help them.

“Sure, we don’t want to meddle and pry into our children’s business; however, you are putting yourself financially on the line. They need to understand that and be open about their own habits,” says Andover, Mass.-based Certified Financial Planner John Barnes.

3. Your relationship with your child could change

Co-signing you child’s mortgage is bound to change the dynamics of your relationship. Your financial futures will be entangled for 15 to 30 years, depending on how long it takes them to pay off the loan.

Seal Beach, Calif.-based certified financial planner Howard Erman says not to let your feelings get in the way of making the correct decision for your budget. Think of how often you communicate and the depth and strength of your relationship with your child. If saying no might create serious tension in your relationship, you likely dodged a bullet.

“If your child conditions their love on getting money, then the parent has a much bigger problem,” says Erman.

Similarly, you should consider how your relationship would be affected if somehow your child ends up defaulting on the mortgage, leaving you to make payments to the bank.

4. You might need to let go of future borrowing plans

Co-signing adds the mortgage to the debts on your credit report, making it tougher for you to qualify for additional credit. If you dreamed of one day owning a vacation home, just know that a lender will have to consider your child’s mortgage as part of your overall debt-to-income ratio as well.

Although co-signing a large loan such as a mortgage generally puts a temporary crimp in your ability to borrow, keep in mind you may be affected differently based on the dollar amount of the mortgage loan and your own credit history and financial situation.

How to Say “No” to Co-signing Your Child’s Mortgage

There is a chance you’ll need to deny your child’s request to co-sign the loan. If you feel pressured to say yes, but really want to say no, Barnes suggests you say no and place the blame on a financial adviser.

“Having [someone like] me say no is like a doctor telling a patient he or she can’t run the marathon until that ankle is healed. It is the same principle,” says Barnes.

He advises parents facing the decision to co-sign a loan for a family member to meet with a financial planner to analyze the situation and give a recommendation for action.

If you choose to take the blame yourself, you may want to take the time to explain your reasoning to your child if you feel it’s warranted. If you said no based on something they can change, give them a plan to follow to get a “yes” from you instead.

LaBrecque suggests that parents who want to help out but don’t want to take on the risks of co-signing instead give the child a down payment and treat it as an advance in the estate plan. So if you “gift” your kid $30,000 to make the down payment, you would reduce their inheritance by $30,000.

The “gift the down payment” method grants you some additional benefits too.

“[The] method has a more positive parent/child relationship than the potential awkwardness of Thanksgiving with the kid(s) and late payments on the mortgage. Also, the ‘down payment gift’ is a quick victory. The kid’s now made their bed with the mortgage; let them sleep in it,” says LaBrecque.

Similarly, you could choose to help your child pay down their debts, so they’ll be in a better position to get approved on their own.

If you must say no, try to do so in a way that will motivate them toward the goal rather than deflate them. Erman recommends lovingly explaining to your child how important it is for them to be able to achieve this success on their own.

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How to Protect Yourself as Co-signer

The best way to protect yourself against the risks of co-signing is to have a backup plan.

“If a child is responsible with money, then I generally do not see a problem with co-signing a loan, provided insurance is in place to protect the co-signer (the parent),” says Barnes.

He adds parents should make sure the child, the primary borrower, has life insurance and disability insurance in case the widowed son or daughter-in-law still needs to live in the home, or your child becomes disabled and is unable to work.

The insurance payments will also help to protect your own credit history and future borrowing power in case your child dies or becomes disabled. But these protections would be useless in the event your child loses their job.

If that happens, “insurance will not pay your bill unfortunately, so even if you are well insured, budgeting is vitally important,” Beaver says.

If you choose to take on the risk and co-sign, Barnes says to make sure you and your child have a plan in place that details payment, when to sell, and what would happen if your child is unable to make payments for any reason.

Additionally, LaBrecque recommends you get your name on the deed. Don’t forget to address present or future spouses. Ask your lawyer about having both kids sign back a quit-claim deed to the parent. If you get one, he says, you’ll be protected in case the marriage goes south, or payments are made late, because you would be able to remove a potential ex off the note.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
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Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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How to Host a Successful Garage Sale

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Whether you’re prepping for a move or finally cleaning out the basement, decluttering your home can bring you peace of mind — and extra cash. Hosting a garage sale is a great way to get rid of old or unused items. Here are a few tips to help you make your sale as profitable as possible.

When is the right time for a garage sale?

Garage sales go by many names — yard sale, moving sale, tag sale, estate sale or rummage sale — but some portion of the event will likely take place outside. If you’re hosting your sale to get rid of stuff before a move, you’ll likely be stuck to a certain date, but if you have some flexibility, consider mild seasons like spring or fall. No one likes rummaging through old items in the blazing August sun, even for good deals.

How to prepare for a yard sale

While the concept of a garage sale is fairly simple, it’s easy to mess up. Many people who host a sale see little success — often because they failed to prepare. Sure, you can just set your unwanted items out on the lawn and have passersby stop and quickly sift through everything. But when you put in a little work ahead of time, the success of your sale is much greater.

“The more preparation that you can do, the more you’ll probably make,” said Ava Seavey, New York-based garage sale expert and author of Ava’s Guide to Garage Sale Gold.

Schedule wisely. First, you’ll want to pick a day for your sale, ideally a Friday or Saturday.  Then you’ll want to take the time to sort through your belongings and carefully select the items you want to sell, choosing items that people will actually find appealing and will want to buy.

Be strategic about prices. Seavey advised that costume jewelry, furniture and collectibles have the potential to make sellers the most money. However, how you price the items is key to ensuring you will earn what these items are worth.

“A good percentage of people who go to garage sales will pay what you have written down,” Seavey said. While some people will negotiate, if your stuff is priced correctly, people will pay it, she said.

Get the word out. You will also want to focus on advertising your sale in your local newspaper and online using garage sale-specific websites and social media channels. Go ahead and describe the types of items you’ll have for sale to attract the right customers.

Be prepared. You’ll want to make sure you have all the supplies you need, including:

  1. Tables
  2. Tablecloths
  3. Pricing labels
  4. Money apron (to hold cash)
  5. Bags
  6. Paper/newspaper (to wrap fragile items)
  7. Signs (to advertise the sale throughout the neighborhood)
  8. Notebook/ledger (to keep track of items sold and money collected)

This may seem like a lot to do in order to sell a few necklaces, purses or electronics. But this preparation can make your sale more appealing and profitable. If having your own sale sounds too time consuming to prepare, you and a friend, family member or neighbor could have the sale together.

What to expect during your garage sale

On the day of the garage sale, you’ll get a variety of customers depending on what you have available for purchase. If you have advertised correctly and have the right things for sale, you could draw in a large crowd.

“I would have plenty of things for everyone. Those are the best sales, when you have a variety,” Seavey said.

Try to keep the sale going from the morning to the late afternoon. Having a sale that lasts a few hours may hinder your ability to make money because you are limiting how many people will be able to come. If your sale starts in the morning and goes until later in afternoon, you can maximize the profits from the sale because those who could not make it during the morning hours can shop in the afternoon before the sale ends.

“There is no magic time to end, but you will do most of your selling in the morning,” Seavey said. “I like to go as long as I can.”

With the money you make from your sale, you can add to or start an emergency fund, pay past-due bills, or even purchase updated items for your new home if you are moving.

What to do after the yard sale

A successful yard sale will leave a lot of money in your pocket and very few unsold items on your lawn. Consider storing your newly acquired cash in an online savings account that earns you interest. If you’re stuck with leftover items, you can always hold another sale, or you can donate them to a charity, church or secondhand store. You won’t make any money when you go this route, but there are benefits to donating.

“You have unloaded everything, you’ve made some money and you have a tax write-off,” Seavey said. “It’s a win-win-win for everybody.”

A garage sale can be the answer when you want to rid yourself of unwanted items — and even make a little money in the process.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kristina Byas
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Kristina Byas is a writer at MagnifyMoney. You can email Kristina here

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What the End of HARP Means for Your Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Home values have been on the mend since the financial meltdown of just a decade ago. This has been good news for people who have struggled with negative equity in their homes, meaning the value is lower than the amount they owe on their mortgage.

The percentage of “underwater” homes has dropped significantly, decreasing 16% year over year at the end of 2018 to comprise 4.1% of all mortgaged properties, real estate research firm CoreLogic found. But that means there are still homeowners who need assistance with recovering their equity.A popular government-sponsored refinancing program aimed at helping these homeowners has recently ended, and people looking for help getting above water may not be aware of the other options they have.

In this article, we highlight and explain what the closing of HARP means for homeowners and several available alternatives.

What is HARP?

The Home Affordable Refinance Program, known as HARP for short, is an initiative that helped underwater homeowners refinance their mortgage. The program was introduced in 2009 after the housing crisis.

HARP allowed eligible homeowners to refinance their mortgages to lower their mortgage interest rate or switch from an adjustable-rate to a fixed-rate mortgage even if they were underwater. Typically, lenders will not allow a borrower to refinance if the house is worth less than what is owed.

In order to qualify, homeowners needed to meet the following requirements:

  • No late mortgage payments over the last six months that were 30-plus days behind, and no more than one late payment over the last year.
  • The mortgage you’re attempting to refinance must be for your primary residence, a one-unit second home or a one- to four-unit investment property.
  • Your mortgage must be owned by Fannie Mae or Freddie Mac.
  • Your mortgage was originated on or before May 31, 2009.
  • Your loan-to-value ratio is more than 80%.

The program had been extended a few times, but the last HARP deadline was Dec. 31, 2018.

Fannie and Freddie’s HARP replacements

Government-sponsored enterprises Fannie Mae and Freddie Mac have refinance products in place that are meant to replace HARP.

Fannie Mae’s High Loan-to-Value Refinance Option

Beginning on Nov. 1, 2018, Fannie Mae has offered a high loan-to-value refinance option to borrowers with mortgages owned by the government-sponsored entity. The product is meant to make refinancing possible for borrowers who are maintaining on-time mortgage payments but have an LTV ratio that exceeds the amount allowed for standard refinance options.

Borrowers must benefit from the refinance through a reduction in their monthly principal and interest payment, a lower mortgage interest rate, shorter loan term or by switching to a fixed-rate mortgage. There is no maximum LTV ratio for fixed-rate mortgages; however, the maximum LTV for adjustable-rate mortgages is 105%.

The eligibility requirements include:

  • The loan being refinanced must be an existing Fannie Mae-owned mortgage.
  • The loan must have been originated on or after Oct. 1, 2017.
  • At least 15 months must pass between the loan origination of the existing mortgage and the refinanced mortgage.
  • Borrowers must be current on their mortgage, have no late payments over the last six months and only one 30-day delinquency over the last 12 months. Delinquencies longer than 30 days aren’t permitted.
  • The existing mortgage can’t be a Fannie Mae DU Refi Plus or Fannie Mae Refi Plus mortgage.

Freddie Mac’s Enhanced Relief Refinance Mortgage

Freddie Mac offers the Enhanced Relief Refinance mortgage to borrowers who are current on their mortgage but can’t qualify for a standard refinance because of a high LTV ratio. The mortgage being refinanced must meet the following requirements:

  • The mortgage must be owned or securitized by Freddie Mac.
  • The mortgage can’t have any 30-day delinquencies over the past six months and only one 30-day delinquency in the last year.
  • The closing date for the mortgage was on or after Oct. 1, 2017.
  • The mortgage can’t already be a Relief Refinance mortgage.
  • There should be at least 15 months between when the original loan was closed and the refinanced loan’s origination.
  • The loan can’t be subject to an outstanding repurchase request.
  • The maximum loan-to-value ratio for adjustable-rate mortgages is 105% and there’s no max for fixed-rate mortgages.

Borrower benefits include a lower interest rate, switching from an adjustable-rate to fixed-rate mortgage, shorter mortgage term or lower monthly principal and interest payment.

Alternatives to refinancing when you’re underwater

If refinancing your mortgage doesn’t sound like the best move for you, consider one of the following alternatives.

Mortgage modification

A mortgage modification is a way to change the original terms of your loan without going through the refinancing process. In some cases, you can work with your lender to switch from an adjustable-rate to a fixed-rate mortgage, extend your loan term, lower your interest rate or add past-due amounts to your unpaid principal balance.

Modifying a mortgage could be beneficial for homeowners facing hardship who aren’t eligible to refinance and are delinquent on their mortgage payments or expect they will eventually fall behind.

Mortgage recasting

If you have a lump sum of at least $5,000 in cash, you could potentially recast your mortgage. A mortgage recasting results in lower monthly mortgage payments. You pay a lump sum of cash to your lender to reduce your outstanding loan principal amount, then your loan is reamortized based on the lower remaining principal balance. Your interest rate and loan term stay the same.

This option makes sense if you’re expecting a bonus from your employer, a large income tax refund or some other financial windfall.

The bottom line

Although HARP has come to an end, there are still options for mortgage borrowers with Fannie- or Freddie-owned loans. In order to qualify for the enterprises’ refinancing programs, it’s helpful to maintain on-time payments even when your loan amount exceeds your home’s value.

If you don’t qualify, be sure to strategize on how best to attack your mortgage balance and rebuild equity. Consider making extra mortgage payments whenever possible by freeing up room in your budget, earning extra income or dedicating unexpected money to your mission.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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