The financial peril of co-signing a mortgage loan

Should a friend or family member ask you to co-sign a mortgage loan, the best thing you can do for everyone concerned is to say no.

Let’s assume that it is your brother who has approached you about co-signing…

Why is it the best thing for your brother if you say no?

Do you remember the mortgage crisis? It came about because people who couldn’t afford the homes they wanted were granted loans. If your brother is asking you to co-sign it means his credit is poor or his income isn’t high enough to qualify for the house he wants. Keeping up with payments is likely to be a struggle.

Saying yes is simply setting him up for failure. Saying yes is also making him indebted to you in a way that could easily harm your relationship.

Why is it the best thing for you to say no?

Because co-signing a mortgage loan will completely change your own credit worthiness.  It is technically not your debt, but since you have agreed to responsibility for it, it will go on your credit report.

Because you are now legally obligated to pay an additional sum each month, your debt to income ratio (DTI) will change. If your current debt is $2,000 per month and you earn $6,500, your DTI is .31, or 30%. If the new mortgage payment is $1,000, it would bring your current debt to $3,000 per month and raise your DTI to .46, or 46%.

That will naturally lower your credit scores, and the high debt to income ratio could cause you be denied credit when you need it. If you are granted credit, it will likely be at a higher rate.

Next, if your brother is late with a payment or misses a payment entirely, the black mark will go on your credit record as well as his – and that will lower your credit scores. Are you prepared to monitor the account and make the payments if your brother is unable to do so?

Even worse than the financial impact…

Whether you help your brother out of love, affection, or a feeling of family responsibility, your relationship could be irreparably strained or even destroyed if he fails to meet his obligations. That strain could affect your parents, your other siblings, and even your spouse and children.

Co-signing a loan is really not worth the financial or emotional risk.

Better solutions…

• Help him get his financial life in order and show him ways to cut expenses and put money aside while he builds his credit.
• Encourage him to focus on buying a home he actually can afford.
• Help him research the various programs that assist with closing costs, etc.
• Help him find a mortgage lender with access to a variety of programs.
• If you can afford it, make him a cash gift that will assist with the down payment.

Is it ever wise to co-sign a loan in order to help someone make a purchase or build their credit?

Yes, but only if:

• You’re in a very solid financial position so additional debt won’t reduce your own credit scores.
• The amount is small – as in a used car loan or a credit card with a reasonable limit.
• You’re prepared to monitor the account and make the payments yourself, so they’re never late.
• The reason is to build credit, not to repair credit that has been destroyed.

If you (or your brother) are ready for a home loan, contact Homewood Mortgage, the Mike Clover Group. We offer the best rates and the lowest closing costs you’ll find anywhere – and we’ll be happy to get you pre-approved. Call us at 469.621.8484 or apply on line at www.mikeclover.com.

Mike Clover

Mortgage Banker

Homewood Mortgage,LLC

O: 469.621.8484

C: 469.438.5587

F: 972.767.4370

18170 Dallas Parkway

Ste. 304

Dallas, TX 75287

NMLS# 23477