We have a 47-year-old daughter with a just-settled divorce. She is a teacher, but she’s not working full time. She is asking her parents to co-sign for a home purchase.
We are retired and have a paid-for home. What financial tool could we use to protect ourselves from default possibilities?
You can’t be a co-signer without putting your finances at risk. From a bank’s perspective, that would defeat the point of co-signing.
When someone doesn’t qualify for a loan or credit on their own, the lender can sometimes approve their application if they find a co-signer. If you’re deemed an acceptable co-signer, it means you have a strong credit history. The lender has essentially determined that you’re not willing to put that pristine credit at risk, so you’d be willing to step in and make payments before you’d let that loan go into default.
If you co-signed a mortgage for your daughter and she then defaulted, the consequences would be the same as if you were the original borrower. The default would stay on your credit report for seven years. You’d have difficulty obtaining credit for yourself, particularly in the first couple of years after the default. Even if your daughter makes on-time payments, you’re still increasing your debt-to-income ratio since you’re legally on the hook for the mortgage.
It’s admirable that you want to help your daughter through a tough time. But unless you’d be able to make mortgage payments for her, I’d urge you not to co-sign. My advice for co-signers is to hope for the best but assume the worst, i.e., that you’ll be the one making payments.
Remember: Banks make money by lending. When they’re not willing to approve a loan without a co-signer, they’re passing on potential profits because the risk is too great.
Consider whether there are other ways to help your daughter financially without signing off on such a huge debt. Could you allow her to move in with you to rebuild her savings? If she has black marks on her credit report, the damage will begin to heal within about two years. Plus, if she’s able to eventually resume full-time work, she’ll probably have an easier time getting a mortgage.
Or could you help her with the costs of renting an apartment? Should she need a co-signer to rent, I’d be less opposed to you putting your name on a lease than a mortgage. Your liability would most likely be capped at …….