Is Love Co-signing Your Child’s Mortgage Loan?
Young home buyers have a rough time compared to their parents when they were first-time home buyers. They have more student debt, slower wage growth and are building wealth later in life than their parents did at the same age.
With so many hurdles to cross, parents like you may be thinking of co-signing so your son or daughter may have a home of their own. This would be a true act of love, but it doesn’t come without risk.
According to The Lenders Network, a co-signer can only help if the principal borrower’s income-to-debt ratio is too low, or has a shallow credit history. And if your child has a poor credit history, co-signing won’t help at all, as lenders will use the lower credit score to make their lending decision.
Adding your income will improve the ratio, but you will be as liable for the loan as your child without having any ownership or equity in the home because your name won’t be on the title and deed, unless you structure the purchase that way. Sharing this debt will also raise your debt-to-income ratio, which may make it more difficult or expensive for you to obtain other loans. And, in the worst case, you’ll have to make any monthly payments your child misses.
So what are the advantages? Making the payments on time and in full will improve your child’s credit scores. Once your child’s financial situation improves, he or she may refinance the mortgage loan to their name only.