Ask the Expert: Should I co-sign my kid’s mortgage?

As a parent, you would do anything for your child. But co-signing a mortgage is a major business decision, not just a family plan. I recommend you take the child out of the equation and think of the child as a borrower.

There are advantages for the borrower if you co-sign the mortgage. With you as co-signer, the borrower may qualify for a loan he or she wouldn’t otherwise get, whether it’s a larger amount or a better rate. Many people have legitimate reasons to seek out a co-signer, including those with the cash to pay the monthly payment but not much credit history. Many self-employed folks also can’t prove a steady source of income.

Ideally, the borrower would refinance to a loan in their own name in the not-too-distant future. In the meantime, if you are confident that the borrower has the ability to pay and can be counted on to pay on time, this could be a good option. You should make a written agreement with the borrower as to when he or she will refinance, what happens if the borrower doesn’t refinance, and what happens if the mortgage payment is not made. Then, you should stick to the agreement. Remember, that as a business decision, nothing is in this for you.

Risks – Beware the pitfalls. They include:

* You are a joint applicant for the loan with all the implications of taking a mortgage. A late payment is a penalty against you, not just the other borrower.

* Remember signing on a new mortgage affects your own debt-to-income ratio. If you need to refinance, you might not be able to do that.

* Ask yourself what would happen in the worst case scenario. If your risk is too high in the worst case, you might think again. If you’re aware of and comfortable with the risks, make sure you know the details and have read the fine print before getting yourself involved in this serious transaction.

* Consider whether the borrower can actually afford the home he or she wants to buy. If they had to use their own money and their own credit, could they qualify for this home? Using your name to buy bigger could be a bad start to this venture and a sign that things may not go well in the future. The ideal situation is that the borrower is realistic about his or her own circumstances.

Back to thinking of the borrower as a child for a second: Young people usually start out with a higher-interest mortgage and their credit standing improves over time. It’s a life thing. Nonetheless, there is nothing wrong with helping out the kids. Just don’t do it at the cost of your own financial well-being.