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When you cosign on a mortgage, you become just as responsible for the loan as the primary borrower — and you can suffer major consequences if they make late payments or default.
Still, you might feel compelled to help out a family member by adding your name to someone else’s loan application, particularly if your daughter or son needs help buying their first home.
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Cosigning a mortgage for your child is a serious decision, and parents should weigh all of the risks before making any promises. We asked financial experts which risks are worth worrying about to help clear out the noise.
These risks include potential damage to your own credit score if the other borrower doesn’t make payments, and more difficulty if you want to get a new mortgage yourself down the line.
Why you might consider being a cosigner
Affording a home can be a challenge for many potential homebuyers — especially millennials. Student debt and stagnant incomes likely share a good portion of the blame. Nearly half of the millennial generation carries student loan debt, with median outstanding balances as high as $30,000, according to the 2019 Homebuyers and Sellers Generational Trends Report from the National Association of REALTORS.
That can make it hard to qualify for a home mortgage. Loan officers have to take a borrower’s total financial picture into account when reviewing their application, in particular the person’s income when compared with their monthly debt payments. That makes it increasingly hard to qualify for a mortgage while carrying a hefty student loan balance or other debt.
Seeing your child deal with this burden may prompt you to help them reach their homeownership goal by becoming their cosigner. With your signature on the mortgage, lenders add your income into their calculations of whether it’s safe to issue the loan. This can help borderline borrowers qualify for a mortgage, especially if they’re having trouble like too much debt or a limited credit history.
4 risks to consider before cosigning your kid’s mortgage
Before you agree to this commitment, consider these four risks of cosigning a home loan for your child.
1. You’re also responsible for the mortgage payments
Not only is your child responsible for their mortgage payments, but you will also be, too. As a cosigner, you’re equally on the hook for those payments and can face negative consequences if your child defaults on their loan.
If you’re expecting to retire during the life of the mortgage, cosigning is an even larger risk, as you may be living on a fixed income.
Dublin, Ohio-based certified financial planner Mark Beaver said he’d be wary of a parent cosigning a mortgage for their adult child.
By cosigning, you effectively take on a risk the bank doesn’t want.
“The risk is, ‘What can happen that can make this blow up?’” added Leon LaBrecque, a CFP and lawyer based in Troy, Mich.
Bottom line: If you wouldn’t be able to comfortably afford the mortgage payments should your child drop the ball, don’t cosign.
“If they need a cosigner, it likely means they cannot afford the house, otherwise the bank wouldn’t require the cosigner,” Beaver said.
2. Your credit profile is affected
Once you become a cosigner, your kid’s mortgage account will also show up on your credit report, even if you haven’t taken over payments. If there is so much as one missed 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 said, 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 your child’s money management skills 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,” explained John Barnes, a CFP based in Andover, Mass. “They need to understand that and be open about their own habits.”
3. Your future borrowing plans will be affected
Since the mortgage will also appear on your credit report, this additional account can make 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 (DTI) ratio` as well. This measures your monthly debt payments as compared with your income.
Although cosigning a large loan 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 loan and your own credit history and financial situation.
4. Your relationship can change
Serving as the cosigner on your kid’s mortgage is bound to change the dynamics of your relationship. Your financial futures will be entangled for as long as 30 years, depending on the time it takes them to pay off the loan.
Howard Erman, a CFP based in Seal Beach, Calif., said 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,” Erman said.
Similarly, you should consider how your relationship would be affected if your child ends up defaulting on the mortgage, leaving it up to you to satisfy the payments.
How to remove yourself as a mortgage cosigner
Fortunately, your cosigning responsibilities don’t have to last as long as your child is repaying their mortgage. Here are a few ways you can be removed as a cosigner:
- Submit a removal request. Some lenders allow a cosigner to be removed from a mortgage after the borrower has established a history of on-time payments. Check with your child’s lender for details on their removal guidelines.
- Refinance the mortgage. Your child may be required to refinance their mortgage in order to remove you as their cosigner. The caveat here is that in order to get approved for a refinance, they must qualify for a mortgage on their own.
- Pay off the outstanding balance. As a last resort and if your financial situation allows, you could pay off the remaining balance on your kid’s mortgage. You could also encourage them to sell the home and work out a way to split the proceeds.
Pros and cons of cosigning
Cosigning a loan as large as a mortgage is a major decision that requires a lot of responsibility on your end, should things go wrong. Be sure you weigh the ups and downs before you say yes.
There is a chance you’ll need to deny your child’s request to cosign 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 advisor.
“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,” Barnes said, adding that it’s best to meet with a financial planner who can analyze the situation and give a recommendation for action when you’re facing the decision to cosign a loan.
If you choose to take the blame yourself, you may want to explain your reasoning to your child if you feel it’s warranted. If you declined based on something they can change, give them a plan to follow that would eventually help you feel comfortable saying yes.
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 milestone on their own.
Alternative ways to help your child get a mortgage
For parents who want to help out but don’t want to take on the risks of cosigning, LaBrecque suggests instead giving your child a down payment and treating it as an advance in the estate plan. So, for example, if you “gift” your kid $30,000 to make a down payment, you would reduce their inheritance by $30,000.
The “gift the down payment” method also grants you some additional benefits.
“The down payment gift is a quick victory,” LaBrecque explained. “The kid’s now made their bed with the mortgage; let them sleep in it.”
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.
The bottom line
The best way to protect yourself against the risks of cosigning is to have a backup plan.
“If a child is responsible with money, then I generally do not see a problem with cosigning a loan, provided insurance is in place to protect the cosigner,” Barnes said.
Make sure your child has life and disability insurances in place, should they unexpectedly pass away or become disabled and unable to work, he added. These policies can help cover the mortgage.
The insurance payments will also help to protect your own credit history and future borrowing power. However, the policies would be useless in the event your child suffers a job loss. If that happens, insurance will not pay your bill. “So even if you are well-insured, budgeting is vitally important,” Beaver said.
If you choose to take on the risk and cosign, make sure you and your child have a plan in place that details the monthly payments, when to sell and what would happen if your child is unable to make payments for any reason, Barnes added.
LaBrecque also shared some recommendations:
- Get your name on the deed.
- Don’t forget to address present or future spouses.
Additionally, ask your lawyer about having your kid (and their spouse, if applicable) sign back a quit-claim deed to the parent, LaBrecque said. If you get one, 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.