Although you love your child and would do anything to make him happy, you might cringe if you’re asked to cosign his mortgage loan.
Cosigning a mortgage for an adult child is a big decision. Your child may have employment and income to support a mortgage payment, yet other issues prevent an approval. His credit score might be too low to qualify, or he might need a cosigner to qualify for a lower rate mortgage. Then again, maybe his credit isn't the problem. Most lenders require at least 24 months of consecutive employment in the same field. If he recently graduated college, he may need a cosigner in order to qualify for a mortgage now, instead of waiting two years.
Understandably, you want to help—and ultimately, it's your decision. However, before you sign your name, it's important to recognize the dangers of cosigning a mortgage for your child, or anyone else for that matter.
1. You Can Potentially Become Liable
Cosigning a mortgage loan doesn’t make you a silent partner. You may think that you're only lending your credit score to help your child get ahead, but what you’re actually doing is becoming a joint applicant on the mortgage. So you are just as responsible for this debt as your child.
He may promise to pay the mortgage on time every month, and he may agree to refinance the mortgage in his name only as soon as he’s eligible for financing, but you can’t predict the future. A lot can happen between now and then. He can lose his job or be unable to work for other reasons. If this happens, you have to step in and make the mortgage payments.
2. Cosigning Can Damage Your Credit Score
If your child manages the mortgage without any late payments, cosigning may not negatively impact your credit—it might help your score. But again, there are no guarantees that your child won't default. Even if he only makes one late payment, the lender will likely report this lateness to the credit bureaus if the payment is 30 days past due. And once this negative remark hits your credit report, your credit score can drop. A lower score will make it harder to qualify for your own financing, and if you do qualify, your child's actions can result in you paying a higher interest rate.
3. It Can Affect Your Personal Finances
If the worst-case scenario happens and your child can no longer afford the mortgage payment, you might step in and make the payment to protect your credit score. Even if your end plan includes selling the house, it can take months to find a buyer. Until then, paying your child’s mortgage every month might affect your lifestyle and personal finances. If you have your own mortgage to worry about, this added burden could put a strain on your budget, to the point where you fall behind financially. You might have to dip into your savings account, which can reduce your nest egg.
4. Cosigning Increases Your Debt-to-Income Ratio
Even if you never make a single mortgage payment on your child’s house, the fact that you have this mortgage in your name increases your debt-to-income ratio. If you don’t have any plans of applying for financing, a higher debt ratio may be the least of your worries. But if you do plan to buy a new house or automobile in the upcoming months or years, having your child’s mortgage on your credit report limits your purchasing power. This mortgage debt can make it harder to qualify for financing, or limit how much you’re able to borrower.
What Can You Do?
You have to decide what’s best for you and your child. There's absolutely nothing wrong with helping a child buy his first home, but it's also important to protect yourself.
If you decide to move forward with cosigning, only do so if you’re absolutely confident in your ability to take over the payments if your child runs into financial hardship. If he manages the mortgage payment online, make sure you get the password and username for this account, and then monitor the payment history. If there are any late payments, you can address the problem before it's too late.
Also, encourage your child to get disability insurance, which can help cover the mortgage if he’s unable to work because of an illness. You may even consider taking out a small life insurance policy on your child—in the event of his untimely death. As the beneficiary, the funds you receive from the death benefit can help pay the mortgage until you find a buyer for the property.