We’ve all needed a little help in our lives and those of us who have been fortunate to receive it are (or at least should be) forever grateful. Helping a child, sibling or parent by co-signing for a mortgage or other type of loan can change the trajectory of your loved one’s life. However, it doesn’t come without risks or possible consequences. Before you co-sign, be aware of what the impact could be to your financial health and understand what the risks are. Above all else, have an exit strategy.
If we had a dollar for every time we’ve heard “but I only co-signed, my son/daughter makes the payments” we’d have a nice slush fund by now.
Too many times, we see parents whose debt-service ratios are crippled because they have co-signed for their children to help them purchase something. Even though their child makes all the payments, the co-signer is still 100% liable in case of default. It reports on both of your credit bureaus and it is treated as though it’s 100% your monthly payment (even if it’s serviced by someone else).
Co-signing for a mortgage can produce a miracle for a loved one. It gives them a chance to get into home-ownership, which can truly set them up for their future in many ways. It comes with risks and these risks aren’t to be taken lightly. Co-signing should be treated as a short-term solution… a means to an end. We can help you plan for an exit strategy.
Marion was happily in a relationship and living in a house owned by her partner. Her daughter Jessica, was purchasing a new condo and discovered some issues on his credit that required him to have a co-signer. Marion happily co-signed for Jess for her 5-year fixed rate bank. She had strong income, great credit and no debt. Tragically, a couple of years later, Marion’s partner passed and she found herself evicted from her home. When she came to us for a mortgage, we discovered Jessica’s credit had become even worse, and penalties to break the bank mortgage were astronomical. There was no way we could refinance Jess and remove Marion from title at that time. We found another solution for Marion and are working with them to get them both into a prime mortgage within a couple of years.
Richard was preparing to co-sign on a mortgage for his daughter Bailey, when his son Bobby’s car died. Richard happily co-signed for a new lease for Bobby, not realizing the impact it would have on his ability to co-sign for Bailey. We had to find Bailey a new strategy to enable her to purchase her first home. Richard was just trying to be fair to his two kids, but the timing of everything was a disaster.
Always look at the big picture and consider the options you’d like to have available to you down the road. If co-signing might impact you negatively and remove your options, consider saying no. Be sure to consult with a professional that has your best interest in mind; one that will look at all of the factors in your life help you plan for the future. I’m just a phone call or email away and I’m here to help!