Your adult child is hard working and responsible. But because of his/her lack of credit history, stricter lending regulations or too many student loans, it is almost impossible for them to get a mortgage. The only way it’s going to happen is if you co-sign on the loan.
Would you do it? That’s a tough question for many parents. By co-signing, you are guaranteeing the debt. If your kid does not pay month after month, you will have to be the person that writes the check.
A survey by the National Association of Realtors last year showed that 60 percent of first-time homebuyers are finding it hard to get a mortgage and the majority of those are millennials (ages 18-34). Parents who have the financial means themselves can opt to say yes to co-signing.
“But you need to look at all possibilities and make your decision on that,” says Keith Krop, owner, mortgage planner and consultant at Eroica Financial Services, Irving, Texas. “If you have a dependable child that hasn’t done anything stupid in their life, then help them if you wish and you will come out alright.”
What is a co-signer? A co-signer is someone asked to be on the mortgage papers because the lender does not completely trust the borrower alone to meet the loan obligations. According to the Federal Trade Commission (FTC), lenders for three out of four co-signed loans ask their co-signer to repay the debt at some point.
Krop says that the advantages for a co-signer are non-existence. But if it is for an adult child, you are giving them the chance to own a house when no one else would give them the chance.
“I’ve only co-signed for my brother-in-law because he wanted to buy a car,” he adds. “A car is a lot different than a home. But he had a good character and worked hard. He made all the payments, and we never had a problem.”
Before you co-sign: The FTC warns people before they decide to co-sign a loan to really understand what their responsibility is in this financial endeavor.
You need to crunch numbers and figure out if you can really afford to pay the loan on top of your own mortgage, other debts and just everyday living. If your child gets hurt, loses their job or some other situation that causes them to not pay the mortgage, you will be paying their mortgage, too.
Pros on Co-Signing
Your child builds equity and pride: Having their own home to take care of while building equity is a good thing. Plus while paying the mortgage each and every month, they will be building a better credit history which can eventually allow him/her to refinance the loan that you co-signed and get a loan on their own.
Your child can live in a better, safer neighborhood: You never know who your neighbors are in an apartment building, Krop says.
“With a home, you have more privacy, and your child can end up in a better neighborhood where they will be safer,” he adds.
You get your own home back: Late last year, the Pew Research Center found that nearly half of males ages 18 to 34 live with family, and 36.4% of women in that age group live at home — the highest portion since the 1940s. Sometimes, parents just want to be empty nesters again and have their privacy. By co-signing a mortgage, your child moves out.
You’ll have a property to sell: Even if all goes sideways and your adult child can’t make payments, you can end up selling the house – hopefully for a profit as home values go up in most areas of the country.
Cons on Co-Signing
Your credit could plummet: A late payment, foreclosure or other action by the lender after missed payments will definitely affect your credit report and credit score.
Your DTI gets compromised: To get more credit, you need to have a certain amount of debt-to-income ratio. Even if you aren’t paying the loan you co-signed, future creditors will consider that as one of your obligations, making your DTI less attractive to lenders.
Relationship could get messy: What if your child doesn’t pay every month?
“This could put a bad mark in the eye of the parents if the child burns them on the house. It will definitely make it tougher to want to ever help them again financially,” Krop says.
Alternatives to Co-Signing
Down payment help: If you don’t want to co-sign, then parents can help their kids with down payment or closing cost assistance. Sometimes a down payment is the thing that stops someone from getting a loan, Krop adds.
Buy the home yourself: Other parents are actually buying the homes themselves and renting them out to their adult children. Once the child has gained enough credit or down payment money, they can buy the home from the parents.
Give a family loan: If you have enough cash to buy the house, then do so but set up the loan just as a bank would for your adult child. Get advice from your financial consultant or accountant first about the IRS rules and regulations.
Whatever option you choose, remember that your relationship comes first. You don’t want money to become the thorn that comes in the middle of your family.
Lee Nelson of the Chicago area writes for national and regional magazines, websites, and business journals. Her work has recently appeared in Realtor.org, Nurse.org, Yahoo! Homes, ChicagoStyle Weddings, and a bi-weekly blog in Unigo.com.