Helping Your Children Buy a Home
Should you co-sign a mortgage for one of your children? It is often all too difficult for first-time buyers to get a mortgage. Young people can find getting a loan difficult when they have student debts or limited credit history. This can even be the case when they are taking responsibility for their financial situation. But starting out in the housing market can be tough.
I remember the struggles myself when I was in my mid to late twenties. From an early age my desire to have my own home was strong. Getting to the point where I could make it a reality was not easy.
If your adult child finds themselves in this situation there is a way you can help.
Co-signing a mortgage for your child could be the only way for them to get a mortgage approved.
Of course, you want to give your child as much assistance as you can, but is it a good idea to help in this way? Co-signing a mortgage for a kid can be extremely risky. Given lots of first-time home buyers make mistakes, especially financial ones, do you want to put yourself in this position? Do you think one of your children can handle this great responsibility?
Co-signing a Child's Mortgage
When you take on the responsibility of co-signing on a kid's mortgage you will be added to the application. This won't give you any rights towards the property even though you are a guarantor on the loan. Your financial situation will be reviewed by the bank to make sure you have a stable income and credit rating to qualify for the mortgage.
Co-signing allows you to help your child afford their own home, without giving you any financial benefit, however. You will be taking on extra financial risk to assist your child, so you should make sure you understand the possibilities and potential consequences of taking this step.
Things to Consider Before Co-signing
Co-signing on a mortgage is a serious responsibility and one you shouldn't take lightly. If something goes wrong and your child is no longer able to pay the mortgage, it will be yours to pay.
You need to carefully account for all your outgoings to make sure you have the financial stability to make payments on this new mortgage. You may already have a mortgage or other loans, as well as your regular costs and expenses.
If you need to pay the mortgage on another property, will you still be able to cover these costs? You might put yourself in a position where you can't make a purchase on another property for yourself. Maybe you were thinking about buying a vacation property somewhere? Make sure you understand all the considerations as you could be boxing yourself in financially.
The Advantages of Co-signing
It provides your adult child with a place to live and builds their credit rating. Down the line, having this property will give them the opportunity to refinance and get a loan without your co-sign. This gives them some stability that could otherwise be missing and allows them to build something in their lives.
With more children than ever staying in the family home well into adulthood, you could get the full use of your home back. If the worst happens and they fail to keep up with the loan payments, you will have a property to sell or rent out, which could see a profit.
The Disadvantages of Co-signing
The actions of your child could hurt your financial situation. If they fail to meet the payments, or even go into foreclosure, this will harm your credit rating. If you need to take out a loan in the future, your co-sign could make it more difficult. Your debt to income ratio isn't going to be as good, even though you aren't making payments on the mortgage.
Money is one of the biggest causes of arguments, and when co-signing a child's mortgage, it could lead to family disputes.
Difficult discussions could be required if your child starts to have problems keeping up with the payments.
Other Ways You Can Help
If you decide that co-signing isn't for you there are some alternatives. It can be difficult to save enough money for a down payment, so your child would benefit from cash to cover this cost. There are other expenses when moving into a new house as well, such as closing costs, so offering to pay some or all of this will be a great help to your child.
You could even give this money to your child in the form of a loan. If you have the funds, what about loaning them the full amount to buy their first home? You should consult with a financial expert to understand and follow IRS regulations for this sort of arrangement. Your kid would then have to make payments every month to you.
Alternatively, you could just outright purchase the home yourself. Your adult child could then rent from you until they are in the position to get a loan to purchase from you. In fact, you could treat it similar to a rent to own agreement. Your son or daughter would pay you each month with a portion of the rent being set aside to fund your child's down payment.
Once they are in a financial position to purchase, they can start researching lenders to work with. There are now a ton for first-time buyer mortgage programs to take advantage of as a first-timer.
Final Thoughts on Co-signing a Mortgage For a Child
Co-signing a mortgage for one of your children is a big deal. Doing so is not something that should be taken with a grain of salt. It would be highly recommended to speak with a financial planner or a trustworthy account to make sure you're making the best financial decision for your family.
Doing proper due diligence will be an essential consideration for your long term financial health.