Cosigning on the Dotted Line
Tighter lender
standards and an unstable job market have made it tougher for some people,
especially those just starting out, to qualify for a home mortgage on their
own. So, some home buyers are turning to family members or close friends
with good credit to co-sign a home loan.
Making sense of the
story
- While becoming a cosigner
may seem like a good solution, money manager and lenders caution against
those who are asked to be the cosigner.
- A cosigner, even if not
living in the house, is really a coborrower, meaning he or she still is
responsible for payments if the occupant is unable to meet his or her
obligations. In other words, if the principal party defaults on the
loan, the cosigner is on the hook.
- One financial planner
suggests potential cosigners take a less risky alternative, such as
providing a cash gift for the down payment. Under current tax laws,
a person can give as much as $13,000 to a person, free of gift taxes, or
$26,000 per person, if a married couple filing jointly is giving the
money.
- Those considering cosigning
a mortgage must conduct due diligence. First, the cosigner must
understand why the family member or friend is asking for help.
Potential cosigners shouldn’t be afraid to look into the requestor’s
personal finances to help determine whether he or she will be able to
repay the loan. Perusing credit reports also will show the track
record he or she has for paying off debts.
- A discussion about
worst-case scenarios also should take place before signing on the dotted
line. Working out a written contract containing an agreement about
what would happen in the event of a default, also is recommended.
- Cosigners also should keep in mind that the
mortgage will show up on their credit report, and could affect their own ability
to borrow money or buy a second home. If the principal borrower
makes a late payment, that also will show up on the cosigner’s report.
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