Whether you are co-signing a mortgage to help your grown child buy their first home, or you are helping a close family member or friend, there are many things you must consider first. You must evaluate the risk to your own finances as well as your relationship with the co-signee.
1. What exactly does it mean to co-sign?
As the co-signer, you are someone who typically does not live at the same property as the home buyer. By co-signing a mortgage, you are adding the security of your own income and credit against the loan. If the home buyer, or the borrower, defaults on the loan, the co-signer is then turned to.
For homebuyers who may not qualify for a mortgage on their own, a co-signer is suggested.
2. What are the responsibilities?
If the borrower is unable to uphold their mortgage payments, it then becomes the co-signer’s responsibility. Likewise, if the borrower misses a payment, that could likely end up on your credit report as the co-signer.
Something else to keep in mind is that once you co-sign a mortgage, you add the borrower’s debt to your own. This could pose some issues in the future when applying for loans.
3. What are the risks?
According to a survey by creditcards.com, 4 out of 10 co-signers end up losing money. This equates to 38 percent of co-signers having to pay back some, if not all of the loan amount.
Not only could you jeopardize your hard-earned money, you could see a significant drop in your credit score.
This type of commitment could also hinder the relationship you have with the borrower. Creditcards.com also reported that 26% of co-signers said that the experience damaged their relationship with the borrower.
4. Can I avoid the risks?
You may not be able to fully avoid all the risks involved in co-signing a mortgage. But there are steps you can take to protect your financial health.
If your name is included on the title of the home, you will be able to sell the property if the borrower defaults on their loan.
It is also wise to sign up for e-mail and text messages to alert you when the payments have been posted so you can monitor that they are not being missed. There are typically grace periods offered for late payments so this will allow you time to help the co-signee with the bill.
5. Can I trust the co-signee?
This is the biggest question you should be asking yourself. No matter how much you care for someone and want to help them, think about their past behavior. If they have had a positive history with making payments on time and are responsible with their finances, this is a good indicator of their trustworthiness.
