We all know that the economy has hurt a lot of people in a variety of ways. One of the biggest issues today for people who have fallen on hard times is their credit score. Between falling credit scores and tightened lending policies, more and more people are finding it harder to get a home loan and therefore are turning to family members or others who have good credit to help them out.
Although agreeing to help a friend or family member by ‘cosigning’ for them may seem like a good idea, there are a few important things you should know before signing on the bottom line.
The first and most important thing to remember is that as a ‘cosigner’, you will always be responsible for the payments and balance of the loan, until it is either paid off completely or the primary borrower refinances it and removes you from the loan. Whether you live in the house or not, you are just as responsible as the party you cosigned for. Be extremely leery of anyone who tells you that you are only on the contract for a short/limited time. If the primary borrower cannot meet their financial obligation, then you as the cosigner will be contacted and expected to make the payment, bring the account current (if delinquent) and suffer all the financial consequences just as if you had obtained the loan in your name only.
You should also know that being a ‘cosigner’ will also affect your credit score. The loan and all its information will be reported and included in your credit report; again, just as if you had purchased the property yourself. Any and all derogatory information such as late payments, defaults ect… will be reflected on your record.
In some cases it might be a better solution to lessen your risk by providing a cash contribution instead of cosigning. Under the current tax laws you can ‘gift’ a single person as much as $13,000 without having to pay a ‘gift tax’. The amount is more for a married couple filing jointly. Consult a tax professional for the details.
Regardless of your decision you should always do your homework. Be sure that the party who is asking for help has the financial ability to make the payments and is responsible enough to fulfill all the other financial obligations that comes with owning property. Ask questions, request copies of bank statements and paystubs, take a peek at their credit report if need be. Be absolutely sure before you sign the bottom line, it’s your financial reputation at risk too.
Always consult a professional with any of your real estate related questions.