Hey everyone, Ryan Bolton here, local mortgage expert, ryanbolton.com. A very common question I got, in fact, I got it just today, is should I cosign on a property? Now I think this is much more common with maybe a parent’s trying to help their kids start out buying a home. Then that’s not necessarily the same thing as just helping a friend or something like that cosign. But here’s the thing I want you to realize. When you’re cosigning on a home loan, you’re equally responsible for that loan, so if your friend or family member misses the payment, you’ve missed a payment. That’s a 30-day late on a mortgage on your credit. They miss another payment, 60 days or 90 days. If they lose their job or are not able to make the payment, that’s when it can get a little scary. And I see situations where people will say, okay, the payment’s more than what I can really afford, but I’m going to get renters or roommates or stuff like that. That’s where it can get a little scary if the person that’s on the loan, a family member or whatever, and all of a sudden you can’t make the payment or all the roommates don’t make their payments.
These situations go ugly fast. I’ve seen cosign situations or these agreements with family and friends, just wreck families, wreck relationships. When you start intertwining personal relationships with finances, a lot of times it can get pretty ugly. You really want to make sure you approach this as a business and say, okay, here’s our requirements. I want to see that you have an extra payment in the bank that I keep or is in reserve. Or you just want to make sure, hey, if the kid really doesn’t make the payment, I can afford that payment until they can move or we can sell the property or find a renter or kick them out or that type of thing. And that’s a horrible situation to go through to kick your kid out of his own house kind of thing.
The other thing you want to really nail down is what happens when you sell the property, what happens to the equity, who gets what portion of the equity. You do want to have that written down and there’s going to be a chance to kind of negotiate or figure that out. Is it a 50-50 split? Is it an 80-20 split? What happens when you sell the property? What happens if the person doesn’t make the payment? What happens to the equity at that particular point? Generally speaking, cosigns can be pretty sticky and I usually recommend don’t do it. If a person can’t qualify on their own, maybe they should wait until they can or just make sure you’ve got the exit strategy, you’ve got a little extra reserve behind it, that type of thing.
One other thing I want to mention about cosigning is if you have, let’s say, a son or daughter going to college, this is a common thing, you can actually have them be the primary borrower and you be what’s known as a non-occupant co-borrower. Now, why is that significant? By being able to use those guidelines, you can actually get primary residence financing for the kid, even if they don’t bring income, assets, down payment, nothing. They’re just living in the home as a primary residence. Now, they still have to have a minimum credit score, of course. They can’t just have zero. But these programs allow you to basically extend your primary residence to your child to where they get the better rates and terms. I’ve seen parents that go and do an investment property loan to have their kid go to school for four years or something like that, where they want to have that investment, or they want to have the kid to have a chance to have a mortgage, build credit, all that type of thing. But you don’t have to do it as an investment property. You can do it as a primary for the child. Again, even if they don’t have a pay stub, a job, down payment, nothing. All the qualifications come from the parents, but you get a tie-in to primary residence financing by having the child actually living in the home full-time.
My short answer most of the time about cosigns isn’t a dead no, but it’s not a highly recommended thing. There’s other ways to do it. Again, depending on the exit strategy, depending on how long you’re planning on keeping the home, but I’d really recommend that you just get a lot down in writing, get things signed, know that there’s consequences that when those things happen, it’s just a business thing, and you just have it cut and dry and just say, hey, you didn’t make your payment. I’m on the hook for this thing now. We’ve got to get the property sold. And now that you’ve missed the payment, you don’t get as much equity, that type of thing. And then just try to get a refinance as quickly as possible.
Consider this as well. When you cosign, you have to keep the property at least six months before you can go off the appraised value of the home. If you buy it at a good deal or whatever, wait six months, and then the child tries to refinance to either pay back the down payment or just get you off the loan. In most cases, you have to keep it at least six months. They’re talking about changing that to 12 months depending on the loan, so you’re going to be stuck with that loan at least that long, and then you can refinance out of it. But if the child can’t purchase it now, what’s really going to change in six months to 12 months? Is it credit that’s the reason they can’t do it on their own? Or is it just really that the loan amount is too high and they have to kind of build up credit or a job or they’re taking on a new job or… There’s always a reason why they can’t do it on their own. Most of the time, it’s just they can’t afford the home they want, and that’s why they have to get the cosigner to help with the debt ratio. That’s where it can get scary. If they don’t make their payment, you’ve got to make it. You’ve just got to make sure if you’re going to cosign for someone that you get notified if it’s late before it goes 30 days late, so after the grace period, get notified and just maybe set aside some money and say, okay, if I’ve got to cover that $1,500 house payment, $2,000 house payment for one or two months, evicting someone or kicking out the kids or whatever or re-renting it to someone else, then you’ve got that mortgage covered. Because it is something once you cosign for it, you are equally responsible for it.
I hope that helps. If you have any questions or specific scenarios you want me to review, or if you want to look at this program where you can do a primary residence financing for someone that’s living in the home and you’re cosigning for them, I’d love to break that down on how that works and what the payments would look like. Check out my website at ryanbolton.com. Schedule an appointment today and we’ll talk to you next time.