Securing a mortgage can be difficult for even the most financially confident young adults. A young person’s short credit and work history, student loan debt or the lack of a down payment can make banks hesitant to give them a loan.
For young people who want to buy their first home and start building equity, these roadblocks can be frustrating. It’s often tempting for parents to want to help their children avoid these obstacles by co-signing on their mortgage. While co-signing may seem like an easy way to help your child, there’s a lot to consider before signing on the dotted line.
1. Take a careful look at your child’s circumstances.
There are some structural reasons that your adult child would not be able to get a mortgage for a home they can afford. The more likely scenario is that your child can’t actually afford the house they want, and the bank can see that. If you are considering co-signing on a loan, don’t just take your child at their word that they can afford the payments. Sit down with them and review their budget, credit history and other debt. Make sure that they have a solid plan to repay their loan.
2. Take a careful look at your own finances.
If your child were to fail to pay his or her mortgage, could you pay it and remain financially stable? At what point would you have to tell your child to sell the house? Your child may have the best of intentions to buy a house and pay for it themselves, but if their ability to make mortgage payments falters, you will be on the hook with the bank. From a legal perspective, co-signing a loan is the same thing as taking on the debt yourself.
3. Consider alternatives.
Co-signing may not be the most financially sound way to help your child buy a house. Another option would be to lend your child money for a higher down payment, which may convince a bank to lend them money. If you have a large amount of cash on hand, you might even buy the house outright and either rent it to your child or give them a family loan that they pay back to you instead of the bank.
4. Plan to review payments.
When co-signing a mortgage, your child’s debt becomes your debt, and you need to know that debt is being paid off. If you decide to co-sign, set up a system beforehand that will allow you to review your child’s mortgage payments. You can request copies of the mortgage statements from the bank or obtain the password to the online account.
5. Plan for the worst.
In the unfathomable event that your child dies, you would take over responsibility for the whole loan as the co-signer. With a large asset like a house, it may be time for your child to take out a life insurance policy that could cover the cost of the mortgage if something happened. This conversation can also be a good time to bring up plans for your own estate.
If you need help with any financial planning questions, contact the Jesse Scroggins Wealth Team, at 205-730-0055. His office is located at 600 University Park Place, Suite 350 in Homewood.