With the high cost of California real estate, it’s not uncommon for buyers to ask a parent or other family member to co-sign their loan. What should you do if you are asked to be a co-signer?
First, consider the risks of co-signing. Job loss, illness, divorce, and other unexpected misfortunes can all cause even a fiscally trustworthy buyer to falter in their loan payments. Are you prepared to cover the payments if your loved one misses them or stops paying altogether? If not, your own credit could be at significant risk.
Even if payments proceed as planned, consider if co-signing will impact your ability to borrow funds for personal use, such as for home upgrades or a new mortgage. Will you still be able to borrow the funds you need, at a rate that works for you?
Next, consider alternative ways to help your loved one with their home purchase without co-signing:
- Make a one-time gift to increase their down payment. This will reduce the size of the loan needed and may help them qualify without a co-signer.
- Offer to loan funds for the down payment. You may be able to provide repayment terms that are more affordable than a commercial loan, and you can secure your loan against the property in case of default.
- Take out the loan yourself and allow your family member to use the funds. You may qualify on your own for a HELOC or other loan with more favorable terms than your loved one can, even with you co-signing. You will then be solely responsible for the debt, but will have more oversight and control to ensure payments are made on time.
- Assist with monthly gifts to help defray the cost to your loved one of taking on a larger or higher-rate loan.
Co-Signer or Co-Owner? If you do decide to co-sign, be clear about your intentions (with both the lender and the borrower) and be sure they are correctly reflected on title to the property. If you intend to be a co-owner, as well as a co-signer, then both your name and your loved one’s should be on title. If, however, you only intend to provide financial back-up for the loan, and do not expect to own any portion of the property, then tell the lender you want to co-sign as a “non-occupant co-borrower” and that they should not include your name on the deed. Too often parent co-signers are included on title as co-owners with their children, even where the parents never provided any purchase funds, paid any costs, or had any expectation of receiving funds upon sale of the property. Unravelling incorrect titling can force refinancing of the loan, and cause property tax and transfer tax issues.
Whether you decide to gift, loan, co-own, or co-sign, Deka Law is here to help you get it done and get it right. Contact us at info@dekalaw.com or 626-765-6272.
Author: Kristen Terranova
