The rising cost of living has had an impact on the housing market as well. Many first-time homeowners have to deal with rising loan interests and mortgage rates. According to statistics from the National Association of Home Builders, housing affordability hit its lowest in the second quota of this financial year since the recession in 2007 to 2009. As the nation tithers toward the brink of recession, would-be homeowners in Plymouth County are between a rock and a hard place.
Many young people are turning to their parents to help with mortgage issues. One way parents can help is to become mortgage cosigners. What does this commitment mean for parents in this position? Here is what becoming a cosigner is all about.
Mortgage Cosigning in Plymouth County, MA – A Complete Guide
Who is a Cosigner?
A cosigner or guarantor is an individual who agrees to cover the loan costs in case the borrower defaults. Therefore, cosigning your child’s mortgage means you will take full responsibility for payments if your child can no longer make payments.
It is worth noting
- A cosigner is not the owner of the house. They only cover liabilities when the borrower defaults.
- Cosigning is not co-borrowing. You have no ties to the assets of the loan transaction. Only your child is entitled to the house. Additionally, you are not equally responsible as the borrower for paying the loan. Your responsibility is to cover defaults.
- You are only liable to the loan debt when your child defaults on payment.
- You have no say regarding the property because it is not yours – if your child defaults, you cannot compel them to list the property or hand it as collateral for the loan or make any decisions about the house in the future.
- You may get prompts to pay an unpaid mortgage before your child gets them.
- The cosigned mortgage appears on your credit report until the mortgage loan gets settled.
Becoming a cosigner for your child can be a good move or a terrible one. It all depends on your age and financial capabilities. You may want to be helpful to your child as they take on a new responsibility and find their place in society. However, before you willingly cosign, have some introspection.
Mortgage Loan Creditor Requirements in Plymouth County, MA
Creditors have prerequisites before they hand out loans.
Financiers look at the borrower’s credit to see if they qualify for the requested loan. The information shows the borrower’s credit record, which determines if the loan gets approved, and the rates and terms of the amount borrowed. A credit record contains
- The credit score – the borrower’s creditworthiness ranges from 300 to 850. The higher the score, the more alluring the borrower becomes to the lender.
- Credit history – financiers use the borrower’s credit history to determine the borrower’s ability to repay their debt. It contains a record of the borrower’s debt payment. First-time homeowners are always encouraged to grow their credit history before applying for a mortgage loan.
- Credit utilization – shows lenders your overall monetary capabilities and financial management skills. It impacts your credit score – the higher your utilization rate lowers your credit score. Your credit card utilization rate should be below 30% for a good credit score. High credit utilization also affects the borrower’s debt-to-income ratio because it raises their deficit
The debt-to-income ratio weighs a person’s financial obligations to their income. Lenders use this metric to determine if a person can repay the loan comfortably. Typical debts include student and car loans, minimum credit card payments, and housing expenses.
A financial capacity is the borrower’s ability to repay a loan using their income, even with other financial obligations. The creditor will focus on the borrower’s debt-to-income ratio for this information.
Collateral is an asset of value pledged by a borrower to secure a loan. Some Plymouth County financiers request collateral when the borrower is unable to pay their loan. Examples of collateral include cars when fully paid, bank deposits, or investment accounts.
Why Your Child Needs a Cosigner
Cosigners in Plymouth County are the security for the loan when the borrower does not qualify for the requested loan amount. Your child is less favorable for a loan because their credit report shows a low credit score, short borrowing history, or high utilization rate.
Their credit report may also show a lack of capacity to finance the requested mortgage loan, pushing them to a lower loan limit. They may also lack valuable assets to act as collateral in case they default on the mortgage. As a cosigner, your good credit score, lengthy credit history, and income decrease the borrower’s debt-to-income, increasing your child’s eligibility for a higher loan limit.
Usually, borrowers need cosigners because their debt-to-income ratio is extremely high, beyond the range acceptable for a loan. Your child may be in debt or managing more with their finances at the time of the loan application.
Why Cosigning Your Child’s Mortgage Loan is a Cautionary Move
Creditors do not Limit Loans Without a Valid Reason
Plymouth County, MA, lenders do not deny borrowers loans through guesswork. They are running profit-making businesses. They have to vet their applicants and determine if the loan given is worth the investment. Their request for a cosigner can be a red flag. They may be taking more than they can bite. Therefore, it is wise to assess the situation before committing to cosign.
Your Child May Not Have Exhausted All their Options
The down payment mortgage is an essential item in homeownership. Most financial advisers recommend saving up to 20% of the entire house cost for the downpayment. While this assertion is accurate, borrowers can find creditors who require less.
- Some conventional creditors require about 3% for mortgage loans – some require even less for the downpayment.
- FHA loans, which have the Federal Housing Administration’s backing, offer 3.5% downpayment mortgage loans.
- USDA loans backed by the U.S. Department of Agriculture’s Rural Development program do not require any downpayment for homeowners looking to live in rural and suburban who meet their eligibility requirements.
Aside from low down payments, borrowers can also receive gift funds – where the giver contributes to the down payment or closing costs for the mortgage without expecting anything in return. Gift funds are a feasible alternative for a parent apprehensive about cosigning their child’s mortgage. It shows you care without being too careless with your investments.
Is Cosigning for Your Child a Good Idea?
Choosing to become a mortgage cosigner for your child is a personal decision. There are no one-size-fits-all answers because the relationship dynamic between a parent and child varies. Furthermore, your financial status is not the same as every other parent in Plymouth County. Regardless of your existing bond, feelings should not be a determining factor when deciding to become a guarantor.
Things to consider when cosigning a mortgage for your child include;
Your Financial Status
According to a report published by Lending Tree, parents with income above $100,000 could cosign their children’s mortgage without financial ramifications in case of payment defaults. However, if you are approaching retirement, cosigning a mortgage with the prospect of living on a fixed income is not wise.
You know your child better than anyone else because you helped raise them. Are you sure your child will work hard to ensure you do not cover the costs of their home? The cost of paying the mortgage can be impossible for you to handle as you advance in age.
Sometimes even a written legal note for a future refund when your child’s finances increases can become problematic or impossible. Remember, once you cosign, there is no easy exit strategy. You could be in for a rude awakening when your child defaults and fails to release you from the commitment despite your financial restraints.
Reasons Behind the Creditor’s Considerations
Know the reason behind the lender’s inability to loan your child. Avoid taking their word for it and acting on your feelings. Financial institutions hardly carry personal vendors when they have a business opportunity. Be proactive in unearthing the reason behind the need for a cosign.
Understand the Risks Involved
Your child may be trustworthy and hardworking. They may only need a push to help them find their wings. After all, they are starting life in tough economic times. You may end up not even paying a dime as a cosign.
However, life happens. You may become liable for the mortgage payments. The 2008 housing crisis affected even the most dedicated of payers. Similarly, job loss, accidents, sickness, or a depreciating housing market can render your child’s income useless. Such changes are beyond anyone’s control.
In case of a default in payment, you will incur additional fees. The creditor may file a lawsuit against you for failing to meet the agreed terms. Your credit score also plunges because of payment inconsistencies.
As a cosigner, be ready to assume responsibility for the mortgage payments. Consider all possible outcomes. Hope for the best and prepare for the worst because there is a huge probability that you will become liable for the loan.
You can prepare for the risks by having cash in anticipation of covering the mortgage payments.
- Cutting down spending
- Consider using your own house as collateral.
- Reconsider taking that retirement trip
- Re-adjust your retirement plans to include the mortgage payments
How to Cosign a Mortgage for Your Child
If you decide to cosign your child’s mortgage, there is a smart way to go about things.
Hold Those Difficult Conversations
Probe your child to know their financial status. Find the reason why they are ineligible for a mortgage loan. Go through their financial history like a lending institution.
Analyze their financial decisions. Consider their work ethic and ability to generate income. Your child could be fresh out of college with a promising job, but they have no credit history to back their financial capabilities. Building a credit history takes time. Thus, you can cosign their mortgage because they need time to develop a credit report that appeals to financiers.
Know the Implications of Your Role as A Mortgage Cosign
Cosigning a mortgage is a risk. Understand the implications of these risks. Know the conditions, responsibilities, and costs. Weigh the findings against your current and future finance. Consider all possible outcomes. Ensure it makes financial sense to you before entering into this agreement.
Have a Way Out
You can agree to finance your child’s mortgage until such a time that they become financially stable. You can;
- Obtain a legally binding written agreement that allows you to finance the mortgage to a limited amount.
- Have a refinancing agreement once your child’s income increases or debt decreases. The move to seek repayment is under the legal principle of subrogation, where the parent assumes the role of the lender once the mortgage payment is complete.
- You can create an agreement that frees you as a cosign if your finances are no longer feasible to sustain you and cover the mortgage or after spending a specified amount on the mortgage.
Monitor the Loan Transaction
Track your child’s payments and ensure they make the entire mortgage payments on time. You can request the creditor for automated notifications for payment updates. Such updates keep you on top of things and help you enforce mitigation strategies on time.
Furthermore, such late payments also impact your credit score as a guarantor. Knowing beforehand enables you to act swiftly and save your credit score.
When it is a Bad Idea to Cosign Your Child’s Loan
The fact that your child need’s a cosign is a red flag. However, The situation may not be dire. Your child is probably young and has the potential to take on financial responsibilities. Your role enables them to achieve it sooner. Nevertheless, if your child feels entitled to the help, you may need to rethink your benevolence.
What you should look for as a parent is;
- Your child’s career trajectory
- Your child’s dependents
- The role of your child’s partner in the mortgage plan
- The stand of the parties involved in the lending process
Your child may be seeking to buy something beyond their ability to afford it. They plan to depend on you to bail them out despite the repercussions on your end. Ensure they are aware of the implications of their action.
In such cases, you can explore other options. Offer your child a gift fund to lessen their mortgage financial burden. Alternatively, you can become their co-investor or co-owner of the house. The individual is your progeny at the end of the day. There is no need to watch them fail when you can help. However, be wise about how you go about helping your child.
To Cosign or Not to Cosign
Your relationship with your child, financial strength, and ability to commit long-term will influence your decision about becoming your child’s mortgage cosigner. Bare in mind that monetary issues can take a toll on relationships. You can explain to your child the financial implications of cosigning their mortgage loan on your end. Talk to a financial advisor in Plymouth County to professionally show all concerned parties the feasibility of the plan.
Hopefully, your child will understand and comply with your decision. Avoid emotional compulsions, the power of relationship dynamics, eagerness to prove loyalty, or any other sentimental reasons. Use facts and data and quantify behavior in your decision-making process.