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. Here are some things every parent should do before they co-sign a mortgage for their adult child:
1. Take a hard 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 look at their budget. Look at their credit history. Look at what other debt they have and make sure that they have a solid plan to repay their loan.
2. Take a hard look at your own financial circumstances.
If your child were to fail to pay his or her mortgage, could you pay it and remain financially stable? How long could you do that for? 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 payment 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. Be sure to consult a financial advisor before making such a serious decision and to make a plan with your child in case they do wind up unable to pay.
3. Consider some alternatives.
Co-signing may not be the most financially sound way to help your child buy a house, as it affects your debt-to-income ratio and can affect your credit if your child fails to pay their mortgage. If you can afford it, a better option would be to lend your child some money for a higher down payment that may convince a bank to lend them money. If you have a large amount of cash on-hand, you can 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. All of these options require having significant amounts of cash on-hand but would have less of an impact on your finances if your child failed to pay the mortgage.
4. Plan to review the 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 do 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. Make a plan for the house if this were to happen by doing some estate planning with your child. 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 to them. This conversation can also be a good time to bring up your own plans for your estate.
Need help deciding whether or not to co-sign your adult child’s mortgage?
The wealth advisors at Southwestern Investment Group are here to help you navigate all big financial decisions. Contact us today to learn how we can guide you toward the best solutions for helping your adult child buy his or her first home.
