Considering Co-Signing For A Home Loan? Think About It First ...

Real Estate Agent with Provident Team Real Estate
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 personAs mortgage lenders limit how much money they will lend and to whom, co-signing home loans is growing in popularity.

"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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

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