An additional source of income can make paying your loan easier. If you have a parent living with you who is willing to contribute, he or she can guarantee the loan. Adding a parent to the loan may make the payments more manageable, but the process itself can be complex. If the loan is simply structured, the bank may opt for a modification. If the terms are complex and there are multiple pieces of collateral involved, you’ll likely have to refinance.
To add a parent living with you to a loan, you must first get approval from the bank. Contact your lender and ask about the bank’s procedure for adding individuals to a loan. It will require a formal request, along with financial information, typically one to two years of W-2s and tax returns along with recent pay stubs and bank statements. The lender will review your loan terms and your parent’s income. It will then determine whether you can modify the loan or if you have to refinance. Collateral will be the major factor in the decision.
Loans are often structured around collateral. If you want to add a parent to an unsecured loan -- meaning a loan that is not tied to collateral like a car or your house -- the bank will just modify the note to include an additional borrower. If you want to add your parent to a mortgage, you have to refinance. The bank will add your parent only if he or she is on the deed to the property or has an equity interest -- in other words, has helped with the downpayment. If the mortgage has already been recorded, you must first add your parent to the deed. Once the new deed is recorded, you will have to refinance to replace the mortgage.
If the bank will not agree to add your parent as an obligor to the loan, it may agree to a guaranty. This means your parent will not be a primary obligor, but rather a secondary source of repayment. Which means that he or she will agree to repay the loan only in the event that you fail to meet your obligations. In many ways, the scenario is the same, the main difference being the priority of the income. Guarantees are more common on business loans, but it can be used in any scenario, avoiding the need to refinance.
If the bank agrees to a modification, you and your parent will sign a modification agreement. This document restates the original terms of the loan before detailing the modified ones. If your parent will guaranty the obligation without becoming a co-borrower, you will sign a modification agreeing to the addition of a guarantor and he or she will sign a guaranty agreement as confirmation. If a modification or guaranty is not possible, you and your parent will sign a completely new set of documents to refinance the loan.