Things to consider before mortgage co-signing
You want to help your friends and relatives to mortgage co-signing a loan, but more than everything you want to help your children with whatever they need. So, if their creditworthiness is stretched beyond the limits and they ask you for a mortgage co-signing what would you do?
It is a decision you make with your heart, for this is your child, relative or friend. Let’s talk about mortgage co-signing for your children... When you are tempted to say yes, on the spot with no analysis, just because your child is asking you to. Who cares she/he is an adult now? As a parent, you want to help, no matter what.
His/her income is too low, or your child wants a lower rate mortgage, or he/she doesn’t have any formal employment history on paper. Maybe because she/he just graduated or changed jobs. Whatever the case you step in and consider mortgage co-signing.
Here are some things you should know and consider before adventuring into long years of mortgage co-signing a loan for your child or someone else.
- You may damage your creditworthiness
If your child/person you have cosigned for is never late with her/his mortgage payments, mortgage co-signing may not have negative consequences for your credit score – it might even improve it.
Problems start if the person you cosigned for is late even with one payment. The lender will report to credit bureaus any 30 days past due payments and your credit score will drop. This will negatively influence your own capacity to borrow money in the future if you need a new car or you want to purchase a bigger house. This lower credit score for you can also translate, down the road, into higher interest rates for your own loans.
If your child, friend or relative doesn’t let you know, you may find out when is too late. If 30 days pass after the due date of a mortgage payment, chances are it will affect your credit score. And what will you do if you know it? For your child, you might choose to pay, but for friends or other relatives, this might not be the venue you want to go. And what if it becomes a habit?
2. Your Debt to Income Ratio will increase due to co-signing a mortgage
The mortgage co-signing means you too have this mortgage in your name. This translates into an increased your debt-to-income ratio for yourself. If you plan to buy a new house or automobile in the upcoming period, this mortgage on your credit report limits your purchasing power. It makes it more difficult to qualify for financing or limits the amount you may borrow. You can omit the payment from your debts if you can show that the other person has paid the mortgage for the most recent 12 consecutive months. However, it must be made from an account of which you are an owner.
There Is a Chance to Become Liable
Co-signing is not about borrowing your spotless credit scores to improve it for someone you care for. Co-signing a mortgage makes you a joint applicant on the mortgage and responsible for the debt as the primary borrower. Your child, friend or relative may lose their job or be unable to work due to various reasons. Under this circumstances, you have to make the mortgage payments.
A foreclosure on the mortgage equals a disaster for you
Think that this was the situation the lender was protecting from when asking for a cosigner. The lender approved the loan just because you have cosigned the loan. The lender may have a claim against you depending on where the property is located. A foreclosure or Short Sale of this property will both negatively impact your credit.
It Can Affect Your Personal Finances
What happens if worst comes to worst and your child, friend or relative can no longer make the mortgage payment? You might decide to make the payments yourself to protect your credit score. If you all agree to sell the house, it might take a long time before you actually sell the property. Meanwhile paying the mortgage every single month will have an impact on your personal finances and lifestyle. Let’s hope you don’t have your own mortgage or another type of loan to pay and endanger your own payments.