Each week Mark Wells at Preferred Financial receives calls from parents wanting to help a child, or another family member buy a house. Inevitably, the question of co-signing comes up. Here are the most asked questions he receives in regard to that issue.
My child has bad credit. Can I co-sign with him so he can qualify? The answer to this most asked question is actually no. A co-signer can be used to strengthen many types of weaknesses in a loan, but cannot be used to overcome bad credit issues of the primary borrower. There are other ways to help them buy a house when credit is an issue, but co-signing is not one of them.
Then what’s the use in co-signing? Generally, co-signing helps when the child is facing high debt to income ratios, or when the child’s income is not verifiable by acceptable underwriting guidelines. For instance, a child may have just started a business and does not yet have 2 years’ tax returns for that business, or a child may be recently divorced and is receiving alimony and child support, but does not have a full year’s history of that income. Co-signing can also help the child meet savings reserve requirements where they are putting all of their available funds into the new purchase and have no reserve savings.
What about the down payment? When I co-sign does that mean I have to be the one to make the down payment? No, under current FHA and conventional guidelines, the down payment can come from either the primary borrower or from the co-signer. It does not matter how much comes from either party. FHA will allow co-signing with only 3.5% down, but conventional lenders will require 10% down when a co-signer is used.
Can I be on title to the house when I co-sign? Yes, it is actually a requirement that you be on title if you are on the loan. Down the road, the child can refinance on their own and get you off the loan, and you can then Quitclaim your title interest back to your child.
What happens if my child does not make the payment on time? This is a critical issue. In co-signing, you are equally responsible in the eyes of the lender, for the payment on the loan. If they fail to make a payment, it will affect your credit. For that reason, I recommend two things when co-signing for a child or family member: a) Have a written agreement in place that you both sign, outlining who will be responsible for the payment, the repairs, and the taxes and insurance on the house. That way, your family relationship will not be disrupted by any misunderstanding. b) Have the lender include you in each billing cycle and make sure you are on their notification list if a payment is past due. Mortgage payments are due on the 1st of each month, and considered late after the 15th. However, the payment is not late in the credit system unless it is 30 days late. So if the lender is notifying you of a late payment, it will still give you 15 days to make sure the payment gets made before it affects your credit.
If you understand and accept the risks, co-signing can work well for all parties involved. It works best if you approach it as a “bridge” to get your child or family member into a house now, but plan for them to get you back off the loan within a few years. That way you have helped them in the interim, but not created a dependency that lasts indefinitely.
For more information or questions regarding Co-Signing a mortgage loan, please contact Mark Wells or call 864-235-9596
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