You know your child is responsible and is ready to buy a home. But if he or she is younger and hasn't built up much of a credit history, lenders may not be as convinced. One way to help: you co-sign your child's mortgage. Doing so gives the bank an extra layer of protection and could be the difference that makes your child’s dream of homeownership a reality.
But co-signing impacts your financial situation. And if your child can't make the payments, you'll be on the hook. So there are a few things you should consider before putting your signature on your child’s mortgage.
ASSESS YOUR QUALIFICATIONS
Co-signers undergo the same vetting process as ordinary borrowers — they have their income, credit history, credit score, assets and debts scrutinized by a mortgage lender’s underwriter. To qualify, you generally need to have strong credit (think a credit score of 700 or greater), a stable income and a low debt-to-income ratio (your monthly debt payments divided by your monthly income).
In addition, because the mortgage will appear on your credit report as an outstanding debt obligation, it could make it more difficult for you to refinance your own home loan or to buy another home in the future. So you should make sure your finances are in a good position before you agree to co-sign a mortgage for your child.
Co-signing a mortgage for your child means that you may have to step in to make the payments if, for whatever reason, your child can’t make them.
MAKE SURE YOU COULD PAY THE LOAN
Co-signing a mortgage for your child means that you may have to step in to make the payments if, for whatever reason, your child can’t make them. A recent CreditCards.com survey of 2,003 U.S. adults found that 38 percent of co-signers said they had to pay some or the entire bill because the primary borrower did not, and 28 percent reported they experienced a drop in their credit score because the person they co-signed for paid late or not at all.
TAKE STEPS TO PROTECT YOURSELF
There are a few things you can do to protect yourself as a co-signer. First, encourage your child to do some estate planning. For instance, it may be a good idea for your child to get a life insurance policy that would cover the cost of the mortgage. In the unthinkable event of your child’s death, these precautions can help ensure that you will be able to pay off the mortgage and not be saddled with an additional liability and possibly an illiquid asset.
Second, make sure you’re monitoring your son’s or daughter’s loan payments. A smart way to keep tabs on this is to sign up for email or text alerts that let you know when the mortgage payments are posted. That can give you a nice layer of protection, since every home loan agreement offers borrowers a grace period for late payments (typically 15 days past the due date), which can enable you to address a problem within that window.
Finally, if possible, have your child automate his or her loan payments to ensure that the mortgage gets paid on time every month.
HAVE A PLAN GOING IN
In the CreditCards.com survey, 26 percent of respondents said the co-signing experience damaged their relationship with the person they co-signed for. While there’s no way to ensure that won’t happen in your case, communication up front can help alleviate some emotional strain in the event that your child struggles to make the payments. Make sure your child knows whether you would be willing to step in and help make payments, and if so, for how long. At what point would you have to sell the house?
While co-signing a mortgage can be a rewarding way to help your child reach his or her dreams, it also has its risks. Make sure you know what you’re getting into and have a plan for what happens if things go south. Then enjoy watching as your child takes this next step into adulthood.