By Sabrina Karl
If you have an adult child ready to buy a home but unable to qualify for a mortgage due to their lack of credit history or burden of student loans, it can be tempting to lend a financial hand by cosigning a mortgage for them. This may be especially appealing if your son or daughter currently lives with you.
But it’s important to consider the risks. Cosigning puts you on the mortgage as an additional party responsible for repayment, but without any legal ownership rights to the property. In short, you are simply lending your financial credentials to boost your child’s mortgage qualification.
For that reason, cosigning only makes sense if you have very good credit, a sufficiently low debt-to-income ratio, and a reliable income. And it’s absolutely critical that you carefully consider how you’d handle any potential pitfalls.
Most importantly, if your child cannot keep up with the payments, you are on the hook to do so. So you should only cosign if your personal finances can easily absorb your child’s mortgage payment on top of your regular monthly obligations.
Also, if your child is ever late with payments, that negative mark will appear on both of your credit reports. For this reason, the responsibility and dependability of your child is an important consideration.
Lastly, cosigning can affect your credit. If your child pays the mortgage faithfully, that can actually increase your credit score. But no matter the payment behavior, the mortgage will impact your debt-to-income ratio as long as you’re a cosigner. So if you apply for any loan in the future, qualification could be more difficult for you.
In the right circumstance, cosigning a mortgage may provide an invaluable hand up for your child. But given the serious risks, it’s a decision to very carefully weigh.