Parents who co-sign on a mortgage need to take a stand on short sales. Many parents have co-signed for their son or daughter helping them purchase their dream home. However, the co-signer never intended to become liable on the mortgage as their son/daughter promised to make the payments on the mortgage. With the change in our economy, many co-signers are left holding the bag or should I say the debt from a mortgage on a home that is upside down. Everyone has mixed feelings as to how to proceed in this situation. Co-signers never intended to be completely liable on the mortgage just to help their son or daughter buy a home. As a parent, I understand how easy it is to give our children whatever they ask for. I do this all the time. That is just what we do as parents. However, it is time for the parents to take a stand and help with the decisions that need to be made about the home.
The home belongs to the son or daughter, however, the debt is tied to the parents and the child. Making the right decision whether or not to do a loan modification on a home or a short sale is like riding an emotional roller coaster. The banks play so many games with the Sellers giving many of them false hopes. Major things that all parties should consider:
1. Loan Modification – what is the objective? Is it to lower the payment or the loan balance? Many banks will not lower the loan balance as they owes investors on the loan. Lowering the payment is a consideration however, does the payment that the Seller is requesting realistic? How much can the Seller afford? Many times the answer is “no”.
How much is the taxes and insurance due monthly on this loan? This figure is necessary to consider as it will be added to the monthly figure that will be paid each month.
Has any circumstances changed since the Seller got behind? Did they get a new job? Do they have enough money to pay a house payment, electricity, gas, food, homeowner’s association dues and other monthly expenses? I would suggest filling out a Financial Statement so that the Sellers can see all their debts they owe.
Would it be better if the Seller did a short sale and just rented or moved in with the parents? Many Sellers are renting bigger and better homes at the same price or less than the mortgage payment without all the headaches of the maintenance of the property.
2. Short Sale – what happens to all parties during this process? Having the right Realtor is very critical to make sure that the short sale is a full satisfaction and that the Seller or Co-signer does not receive a deficiency judgment. Sell Fast Realty has a 98% success rate of getting the bank to accept a short sale as a full satisfaction and not go after the sellers for the difference.
A short sale will affect your credit score of approximately 150 points off your FICO score. President Bush’s law expires on December 31, 2012 that allows many Sellers not to have to pay taxes on the difference owed to the bank up to $2 Million Dollars for a married couple. How does this affect the co-signer? I am not a CPA, however, I have spoken to a couple of them and they said that if the co-signer never claimed the home as homestead or on their taxes, that the Seller (child) could claim the entire amount of loss. A letter of explanation and a little more documentation will need to be provided to the IRS. What this means, is that the co-signer would only be affected by way of credit. A letter of explanation to the credit bureaus would also help the co-signer on rebuilding ding on their credit versus being responsible for thousands of dollars should the house go to foreclosure.
So how can a parent tell their child who is going thru a tough time to think about how it will affect the parents’ future? This is a very hard situation as I have dealt with many parents and children in this same situation. What I would recommend is to let a third party person like myself explain what happens to the Sellers and co-signers during this situation. I would recommend that the parent download my free report www.FreeFactsAboutForeclosure.com and educate yourself and ask your children to do the same.
You can also call my office at 407-888-3433 for a free confidential consultation. Again, remember it is not only the children going thru this situation it is you as a parent and everyone should be advised of all the options available to them and the sooner the better.
I hope this article helps children and parents in this situation. The main thing that everyone has to remember during this hard time is that you love each other and money always brings on arguments. God has a plan for everyone and may he bless you all during this difficult time.