"Co-signing" a home loan is when a third-party -- usually a parent or relative -- promises to make repayments to the bank in the event that the borrower falls behind on his obligations.
Money experts usually advise against co-signing notes because of the long-term financial risks, but people still do it for a number of reasons including "wanting to help".
If you're thinking about co-signing a home loan for a friend or loved one, it's important to consider the implications of sharing credit with another person.
The four questions below may help you with your decision:
- Why can't the borrower get approved on his own? Is it because of poor credit ratings? Lack of income? History of foreclosure? Hopefully, if you're co-signing for a loved one you already know this, but it doesn't hurt to ask a few questions in order to get the whole story.
- If the borrower stops paying the mortgage, can you afford to make the full payment due each month? Many people don't think of it this way - but that's really what you're signing up for. Your name is on the note and you are responsible for making the payments if the person you co-signed with can't ... or won't.
- If the borrower defaults on the mortgage and doesn't notify you, how will a foreclosure on your credit rating impact your family finances? If you do decide to go through with it, it's a good idea to keep up with the mortgage company in order to make sure payments are being made. A foreclosure on your credit history can severely limit your credit rating for many years to come.
- When the co-signed loan appears on your credit, will the debt load prevent you from getting approved for your own loans in the future?
Not only can a co-signed home loan create serious financial burdens, but it's a long-term commitment, too.
Once the note is co-signed, the only way to separate the signers is terminate the note entirely. The two ways to accomplish that are to remortgage the home out of the co-signer's name, or to sell the home and retire the debt.
Co-signing on a mortgage is not "bad" but bad things can happen should the primary signer face personal and/or financial difficulties. Before agreeing to share credit, consider the implications should something go wrong. I'm not trying to scare you, or talk you out of co-signing for a home loan with someone. However, given that this situation usually arises when a loved one needs help, it doesn't hurt to throw a little logic and analysis into mix. Many people make these types of decisions solely on an emotional basis ... and they may regret it later when the situation changes.