Your adult child is hardworking and responsible. But because of their 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 a mortgage loan is going to get approved 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 falls behind on payments, you will be responsible for writing the check to the mortgage lender.
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; the majority of those are millennials (ages 18-34). But, for parents who have the financial means themselves, co-signing a mortgage may be a good idea.
“You need to look at all possibilities and base your decision on that,” says Keith Krop, owner and mortgage consultant at Eroica Financial Services, Irving, Texas. “If you have a dependable child, then you will come out alright.”
How does a cosigner on a mortgage work?
A cosigner is someone added to the mortgage application and other loan documents promising responsibility for the loan, but who doesn’t get any rights to the property. A cosigner must have stable income, a low debt-to-income ratio, and good credit in order to help qualify for a mortgage loan.
Krop says that financial advantages for a cosigner don’t exist. But, if it’s for your adult child, you are providing the opportunity for them to own a home when no one else would give them the chance.
“I’ve only cosigned an auto loan for my brother-in-law,” he adds. “A car is a lot different than a home. But, he worked hard and made all the payments. We never had a problem.”
Before you cosign a mortgage
The FTC warns consumers that before they decide to co-sign a loan they need to understand their financial responsibility.
You need to figure out if you can truly afford to pay the loan on top of your own mortgage, other debts, and everyday living expenses. If your adult child gets hurt, loses their job, or another situation that may cause them to not make mortgage payments, then you will be paying that mortgage, too.
Pros of cosigning a mortgage
Your child builds equity and pride. Having their own home to take care of while building equity is a good thing. Plus, paying the mortgage every month builds a better credit history, which may allow them to refinance the loan that you co-signed on and get a loan on their own down the road.
You get your own home back. As of 2016, the Pew Research Center found that 15 percent of Millennials (ages 18 to 34) live in their parent’s home. Some parents want to be empty nesters and have their privacy. By co-signing a mortgage, your adult child moves out.
You have a potential investment property. If all goes sideways and your adult child can’t make the mortgage payments, you can rent out the house or sell it — as real estate values rise in most areas of the country, you may gain a profit.
Cons of cosigning a mortgage
Your credit could decline. Any late payment, foreclosure, or other action by the lender after missed payments will affect your credit report and credit score.
Your DTI is impacted.To be eligible for credit, you need to have a specific debt-to-income ratio. Even if you aren’t the primary borrower for that loan, future creditors will consider it an obligation, making your DTI percentage less attractive to lenders.
Relationship could get messy. If your family member doesn’t pay every month, then you may have to have some tough conversations.
“If an adult child misses monthly payments, then bad marks can appear on the parent’s credit report. This can make for messy relationships, and will make it tougher to want to help them again financially,” Krop says.
Alternatives to cosigning a mortgage
Down payment help. If you don’t want to cosign a mortgage, then you can help your kids with down payment or closing cost assistance. A down payment is a common thing that stops someone from getting a loan, Krop adds.
Buy the home yourself. Some parents buy the homes themselves, and then rent out the home 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 and set up a loan directly with your adult child (just as a bank would). Get advice from a financial consultant or accountant first about the IRS rules and regulations.