An adult child with limited credit or credit issues may be looking at financing options while wondering "Can a parent cosign on a mortgage?"
Can a Parent Cosign on a Mortgage?
As long as the parent has good credit, he or she can cosign on a mortgage for a child. The child may not be able to qualify for financing on his or her own because of a lack of credit history. A person who has recently finished school or has not been in the work force very long may not have had a chance to establish a long enough track record to demonstrate to a prospective lender that he or she is a good credit risk.
Another scenario where a parent may be asked to act as a cosigner on a mortgage is where the adult child has had some credit issues that make it impossible for him or her to get preferred mortgage rates. Rather than settle for a sub-prime mortgage (with a high interest rate) or being denied financing altogether, asking a parent, sibling, or family friend to cosign the mortgage is an option.
Advantages of Adding a Cosigner
Adding a cosigner to the mortgage documents may mean that the borrower can qualify for a higher mortgage than if his or her application was being considered on an individual basis. With a loan from the Federal Housing Administration (FHA), the cosigner's total income can be included when determining how much money can be advanced for the mortgage. The cosigner is not required to live in the home being mortgaged with this type of loan, either.
If the mortgage is not an FHA loan, the cosigner must be living on the premises to be acceptable to the lender. The cosigner's entire income is not factored into the mortgage calculations, either. In this scenario, only half of the cosigner's income is included in the figures.
Disadvantages of Cosigning a Mortgage
Cosigning a mortgage for a child or other person who cannot qualify for financing on his or her own is a very generous thing to do. It is something that the cosigner needs to think about very carefully before doing, though.
The cosigner is responsible for making payments on the loan if the primary holder of the mortgage defaults. If the other person misses a payment, then the lender looks to the cosigner to pay. The only way the cosigner will be released from this responsibility is when the loan has been paid off in full or if the lender agrees to remove the cosigner's name from the mortgage (the latter scenario is unlikely to happen, however, since the primary borrower was unable to arrange financing on his or her own).
A parent who is considering cosigning for a mortgage also needs to realize that the amount of the loan will be considered his debt as well. Agreeing to make mortgage payments if a child is unable to may inhibit the parent's ability to get his own mortgage or to qualify for other loan products.
If the child actually defaults on the mortgage and the parent has to make the payments, it could very well have a negative impact on the parent's financial situation. If the cosigner is late or misses a payment, his credit rating may be negatively affected.
When a parent is involved in his child's finances by cosigning a mortgage, the personal relationship between the two people has the potential to become strained. Rather than the child standing on his or her own two feet, the parent may be tempted to give advice or pry into the adult child's financial matters.
The answer to the question "Can a parent cosign on a mortgage?'" is yes. It may not be the best choice for him or her to do so, though.