Real Estate
To Cosign or Not to Cosign
If you're asked to add your name to a loan, Should you say yes?
By Anne Kates Smith, Senior Associate Editor
From Kiplinger's Personal Finance magazine, February 2009
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Two years ago, cosigned mortgage loans were rarities. These days, though, cash-strapped and credit-challenged home buyers are turning to cosigners, usually relatives willing to vouch for the mortgage payment in order to seal the deal with a lender.
A cosigner can bring the debt-to-income ratio within a lender's guidelines or increase the amount that can be borrowed. "It's a great benefit," says mortgage broker George Hanzimanolis, at Bankers First Mortgage outside Philadelphia, "but there are definite pitfalls."
The benefit for Destiny Borrelli's family is clear: Dad's signature not only helped get the mortgage on their home in Clifton Heights, Pa., approved, but it also got her a lower rate. The arrangement is working for Borrelli and her father, John Dukes. "I have no trouble making the payments," she says.
The pitfalls? Cosigners are on the hook for the payment if the mortgage holder doesn't make it. Plus, as a cosigner, your borrowing power is reduced because the mortgage obligation is on your credit report. If you choose to cosign, have an understanding -- in writing -- about when the borrower will refinance and remove you from the loan.
Meanwhile, monitor the payment history to make sure that the mortgage holder is building good credit (so he or she will be able to refinance) and that you're not at risk. Insist on a reserve account, with two to three months' worth of payments, that requires both signatures for a withdrawal.
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Reader Comments (3)
Posted by: C. H. Renner at 01/27/2009 02:34:10 PM
As an ex banker and current financial advisor, I beg to differ. NEVER cosign a loan...too many pitfalls and potentential added costs, e.g. legal fees, late payment penalties, etc. INSTEAD, sign a GUARANTEE for ONLY outstanding principal and interest. Better still, negotiate a PERCENTAGE of the P&I...usually 50% will do.
Posted by: s2kreno at 01/28/2009 07:32:54 PM
I would NEVER advise anyone to co-sign on a loan. And I recommend that people don't ask for that unless the relationship with the other party means nothing to them. With all the foreclosures and bankruptcies, job losses and divorces you'd have to be nuts to assuming someone else's risk. Especially someone unproven or with an irresponsible past. The whole housing problem stemmed from people taking on loans they weren't equipped to handle. A little delayed gratification and discipline is in order.
Posted by: Concerned Mom at 01/29/2009 09:23:19 AM
Co-signing a loan is for fools. Of course, parents who haven't said no to their offspring for their whole lives are perfect examples. So sure, Dad, go ahead and sign!! Then in a couple of years you'll be hearing from them for the rest of the mortgage. But they already consider everything you have to be rightfully theirs. Why would any responsible columnist suggest this? Was it your parents? How nice of them!