As 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:
- Why can't the borrower get approved on his own? Is it because of poor credit ratings? Lack of income? History of foreclosure?
- If the borrower stops paying the mortgage, can you afford to make the full payment due each month?
- If the borrowers defaults on the mortgage and doesn't notify you, how will a foreclosure on your credit rating impact your family finances?
- 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 re-mortgage 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.
