If you’re considering co-signing a mortgage—say, to help your grown kids buy their first house—it’s wise to take a step back and consider whether this move makes sense. Sure, you're helping a loved one purchase property, but this type of arrangement could also pose a risk to your own finances (not to mention your relationship with the co-signee).
So before you put your John Hancock on the line which is dotted, ask yourself these four key questions first.
1. What is co-signing, exactly?
When a home buyer uses a co-signer, the buyer becomes what’s known as the "occupying borrower"—the person who is going to be living in the home.
Meanwhile, the co-signer—usually a relative or friend of the occupying borrower—is someone who typically doesn't live at the property.
Co-signers physically sign the mortgage or deed of trust in order to add the security of their income and credit history against the loan. In turn, both parties take on the financial risk of the mortgage together—meaning that if the occupying borrower defaults on the loan, the co-signer is expected to cough up the cash.
To qualify as a co-signer, you must have a strong credit history and good income, says Ray Rodriguez, regional sales manager at TD Bank. Co-signers get vetted just as ordinary borrowers do—they have their income, credit history, credit score, assets, and debts scrutinized by a lender.
2. What are my responsibilities when co-signing a loan?
If anything affects the occupying borrower's financial health—for example, loss of a job or severe medical problems—"the co-signer is responsible for the [mortgage] payments," says Rodriguez.
Moreover, if the occupying borrower misses a mortgage payment, that blemish can go on your credit report, as the co-signer, as well—potentially damaging your credit score significantly.
According to data from the credit analysis firm FICO, someone with an excellent credit score—780 or above—could see it drop 90 to 110 points if mortgage payments are missed.
Another thing to consider: When you co-sign a mortgage, you’re adding that person’s debt to your own, reducing your own borrowing power. As a result, “Your chance of getting a loan yourself in the future could be in jeopardy,” says Janine Acquafredda, a real estate broker at Brooklyn-based House-n-Key Realty.
3. What are the risks of co-signing?
Real talk: When you co-sign a financial product—whether it be a mortgage, a car loan, or a credit card—you could get burned.
In fact, in a 2016 CreditCards.com survey of 2,003 U.S. adults, 38% of co-signers said they had to pay a part of or the entire loan or credit card bill because the primary borrower failed to do so. Furthermore, 28% reported they suffered a drop in their credit score because the person they co-signed for paid late or not at all.
Most often, people co-sign mortgages for their friends or family—but co-signing inherently puts the relationship in jeopardy. Proof: Of respondents in the CreditCards.com survey, 26% said the co-signing experience damaged the relationship with the person they had co-signed for.
4. How do I mitigate my risks?
The good news? There are several safeguards you can put in place to protect yourself as a co-signer.
First, make sure your name is put on the title of the home. That way, if your borrower can't pay the mortgage, you have the power to sell the property.
Second, take steps to monitor your co-borrower’s mortgage payments. You can do this by setting up email and text alerts to let you know when mortgage payments are posted, or asking the mortgage lender to notify you if the borrower misses a mortgage payment.
This offers a nice protection, since every home loan agreement offers borrowers a grace period for late payments.
Typically, there’s a 15-day grace period, in which case you would have 14 days after the payment is due to help your co-signee pay the bill without incurring a late fee or taking a hit on your credit report, says Guy Cecala, chief executive and publisher of Inside Mortgage Finance.
You’ll also want to establish clear lines of communication between you and your co-signee—and make sure the person knows how to contact you if he or she has a problem with the mortgage.
5. Do I trust the borrower?
Before offering to become someone’s co-signer, ask yourself whether you truly trust the other person to be financially responsible for making the mortgage payments.
Pro tip: Past behavior is a good predictor of future behavior. If the person has had trouble making credit card payments or has a pattern of not meeting other financial obligations, he or she may not be responsible enough to be taking on a mortgage, especially one that has your name attached to it.
The bottom line: Co-signing a mortgage is serious business. You’re not just putting your name on a piece of paper—you’re putting your own finances, including your debt obligation and your credit score, at risk.
