Consider this scenario: Your son wants to purchase his first home in Gwinnett County. There’s only one problem: When he went to get prequalifed for a mortgage, it turned out that his credit wasn’t so great. The only way your child can get a home loan now is if you co-sign. Co-signing someone else’s mortgage, even if that someone is your child, spouse or other close relation, is never a move to make without doing a lot of thinking first. Weigh the pros and cons of guaranteeing someone else’s loan before you sign on the dotted line.
Understand what’s at stake
When you co-sign a loan, you aren’t just making an empty gesture. You’re guaranteeing the debt in the event that the other person stops paying or is unable to continue paying. According to the Federal Trade Commission, the lender should give you a co-signer’s notice that explains exactly what your obligations are as the co-signer. You may owe up to the full amount of the debt if the homebuyer stops paying. You might also have to pay collection fees and any other penalties. There’s also a chance the lender can sue you if the other person falls behind on payments.
Acting as a co-signer can negatively impact your credit, too. The mortgage shows up on your credit report and is part of your credit score. Even if the other person pays as agreed, the loan impacts your debt-to-credit ratio. If you want to buy a home, car, or other major purchase, you might have trouble getting a loan for yourself, even though your credit was previously excellent.
If you decide to co-sign
While conventional wisdom recommends never co-signing a loan, it can be difficult to turn down a person when he asks, especially when that person is your child. You might decide to take the risk and co-sign for your child if he is trustworthy but hasn’t had a chance to establish a credit history yet. In that case, it’s important that you have the money to pay the mortgage in case something happens and he isn’t able to make the payments.
You can also negotiate with the lender to reduce your responsibility as a co-signer. For example, the lender can include a statement in the contract that says you’re only responsible for the principal on the loan — not any late fees or attorney’s fees — if the other person defaults.
Other options
Having a co-signer isn’t the only way a person with a short or not-great credit history can get a mortgage. First time homebuyer programs often issue mortgages to people with less-than-excellent credit. Federal housing administration (FHA) loans can also be ideal for a person with a lower credit score. Instead of having a co-signer guarantee the loan, these programs require the borrower to pay mortgage insurance.
If someone asks you act as a co-signer, consider other options first before agreeing to put your financial security and credit on the line.
Image source: Flickr
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