By Peter G. Miller
CTW Features
Question: We have been asked to co-sign a mortgage. This is not something we want to do, even though a close relative is involved. How do we get out of this?
Answer: Such a request should not be seen as surprising. According to a 2015 study by the National Association of Realtors, 24 percent of all first-time buyers purchase with a gift from relatives or friends.
Co-signing a mortgage is essentially like a financial gift, but it’s different in a very important sense: If you give a gift of money, that’s it – your obligation is limited to that amount. However, if you co-sign a mortgage and there’s a default, you can be responsible for any and all unpaid money owed to the lender. For this reason, co-signing is not something to undertake without caution, it is a serious financial commitment.
Also, co-signing a mortgage can impact your credit.
According to TransUnion, one of the three major credit reporting agencies, “Essentially, when you co-sign on a loan, you are taking on legal responsibility for the account, and it will appear as your obligation on your credit report.”
Some alternatives to co-signing look like this:
First, see if the borrowers qualify for down-payment assistance. There are thousands of programs nationwide.
Second, see why a co-signer is needed. If there is a credit issue perhaps a gift can be made to reduce credit card bills or other obligations, a step that can raise credit scores.
Third, have the borrower check his or her credit reports for errors and out-of-date items that can reduce credit scores. Free reports are available from AnnualCreditReport.com.
Fourth, take a look at what the borrower really needs. Maybe they should be borrowing less given their savings, credit standing, and housing needs, and by borrowing less perhaps they won’t need a co-signer. Not an easy conversation but realism counts. Perhaps a friendly real estate broker or loan officer can suggest a “right-sized” loan amount.
Fifth, maybe you can help the borrowers other ways as in “I can’t co-sign at this time because of other financial obligations, but I can help with some down payment money. Would that be good for you?”
Lastly, you have the right to say no. It’s your credit standing and you don’t need a reason or justification to turn down a financial request. Such a decision might be discomforting at family dinners but don’t let social pressure force a decision you don’t want to make. If someone other than the borrower says you really should co-sign, suggest that it might be a great opportunity for them….
© CTW Features
Peter G. Miller is author of “The Common-Sense Mortgage,” (Kindle 2016). Have a question? Please write to [email protected].