Cosigning a mortgage for a friend or relative is a big decision. Though cosigners can help borrowers with low income or poor credit to qualify for a loan, entering into such an agreement can have negative consequences for both parties if the loan goes into default. Fortunately, there are alternatives to cosigning a loan.
When you cosign a loan for another person, you are agreeing to assume responsibility for the loan if the borrower stops making the payments. The full amount of the debt appears on your credit report, and all payment activity affects your credit score. If the borrower defaults on the loan, you must make the payments yourself. If you fail to do so, the lender may file a lawsuit against you.
Down Payment Assistance
If the borrower doesn't have enough monthly income to qualify for the mortgage payment, consider offering to help with the down payment. Providing the lender with a larger down payment may lower the balance on the mortgage enough so that the borrower can qualify for the loan without your help. In some cases, a larger down payment may also lower the borrower's interest rate, which further decreases the monthly payment.
If you can afford to do so, consider purchasing the home yourself and selling it to the other party on a land contract, also called a "contract for deed." In this case, you will handle all business with the bank, so you can make sure that the payments remain current. To ensure that you don't own the house indefinitely, you can structure the land contract so that the borrower must refinance under his own name on a certain date in the future.
If you can't help the borrower in any other way, consider helping him develop a savings plan to put away extra money on his own. If you decide to act as a cosigner in spite of the risks, make sure that you protect yourself as much as possible. Monitor the mortgage to verify that the borrower is making the payments on time. According to Kiplinger, it's also beneficial to open a bank account that holds a few months' worth of mortgage payments and requires your signature for withdrawal.
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