Even if your adult child is hardworking and responsible, they may be struggling to get a mortgage. The problem could be their lack of credit history, strict lending regulations or too many student loans. By cosigning their mortgage, you may be able to help them purchase a home.
But before you sign on the dotted line, here’s a look at what it really means when you co-sign a home loan for your child.
Should you cosign a mortgage for an adult child?
Whether or not to cosign a home mortgage is 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 18 percent of millennial homebuyers are having a hard time qualifying for a mortgage. 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 — also known as a non-occupant co-borrower — 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 a 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 non-occupant co-borrower 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 could 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 has another situation that may cause them to fall behind on repayment, then you will be responsible for the loan amount.
Pros & cons of cosigning a mortgage for your child
Pros of cosigning a mortgage
Your child builds equity and pride. Plus, paying the mortgage every month helps them improve their credit rating, allowing them to refinance the loan you co-signed on and get a loan on their own down the road.
You get your own home back. As of 2020, the Pew Research Center found that 52 percent of young adults (ages 18 to 29) live in their parent’s homes. 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 own credit report and credit score.
Your DTI will also be 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.
Relationships could get messy. If your family member doesn’t make the loan payments 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
Give a down payment gift. If you don’t want to cosign a mortgage, depending on the type of qualification assistance your child needs, 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 simply purchase the home and then rent it 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 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.
Cosigning a mortgage for your child FAQ
Can I cosign a mortgage for my child?
Yes. If you have good credit and a high enough income, you can cosign on your child’s mortgage. When you cosign, the lender will look at your sources of income. So, if you don’t have a job, that income might be retirement or rental income.
Does cosigning for a house affect your taxes?
You can cosign for a house without impacting your tax situation. The person who lives in the home, your child, can take advantage of the tax-deductible expenses that come with homeownership. You won’t be able to take those deductions.
If the property is sold, the proceeds would go to the homeowner. So, your child would receive all of the proceeds.
With that, your personal income taxes wouldn’t be impacted by the sale.
What are the risks of cosigning a loan?
When you cosign for a loan of any kind, you are financially responsible for the entire amount. So, if your child struggles to make the payments, then you’ll be on the hook for the payments. If payments are missed, that will impact your credit score. In the worst case, your child defaults on the loan and the lender sues you to cover the cost of the loan.
Beyond the financial implications, a big risk of cosigning a loan is the added tension in the relationship. Money is a difficult topic to discuss. If things don’t work out well, your relationship could be damaged.