Before Co-signing on a Mortgage � Think Twice

Co-signing for a loan is nothing new. Many of us at some point in our lives have needed a co-signer. Whether it was for an auto loan, or a supplemental school loan, co-signers have been there when needed them for various expenses we just couldn�t qualify for on our own. However, with the recent tightening of lending standards a new phenomenon is coming to light. People are starting to use co-signers on home loans. This trend, though it may be helping more families purchase their own homes, carries substantial risk to the co-signer, beyond any related risk for smaller loans.

What Are the Risks?

For any loan that you co-sign, you are taking full responsibility for any payment, should the primary borrower default or is unable to pay. This means that in addition to your own expenses, which are likely substantial, you must be both willing and able to take over responsibility of payment for the person you�ve co-signed for. If we consider smaller loans, such as auto loans or school loans, this may not have a huge impact but can still be a burden. However, when we are considering a home loan which can easily surpass the hundred thousand dollar mark, the effect on a co-signer�s finances can be devastating if the primary borrower is unable to make the payment, defaults, or completely bails on the loan with no forwarding address. Any defaults or missed payments will also affect the co-signer�s credit report, making it harder to get credit and loans in the future. Also, if you are not listed as a co-owner on the property, you could end up making payments for a house that is not yours. Once you co-sign for a loan, there is no turning back. The only way to get your name off of the loan is to pay the remainder of it, or for the lender to let you off of the loan.

Should I Co-sign?

This is a decision that is entirely up to you in light of your circumstances. Now that you are aware of the risks, make sure that you are completely familiar with the primary borrower. While you may know this person well, you may not know them well financially. The way someone conducts themselves financially can be completely different and foreign compared to how you think of them on a daily basis. Become familiar with their financial history and their credit. Do not be afraid to ask them questions; after all, this is a favor you will doing for them, at a potentially substantial cost to yourself. The borrower should be more than willing to provide you with all the information you request. Be wary if they do not seem honest and upfront with you. Make sure that you will actually be able to afford the home loan payments on your own, should the primary borrower face financial hurdles.

Additional Resources

• Co-signing a loan