Can a Parent Cosign a Home Loan? A Guide for Parents and Children

Cosigning a home loan for your child can be a big decision. As a parent, you want to help your children become successful homeowners But taking on the legal and financial responsibility of being a cosigner is not something to be done lightly.

In this comprehensive guide, we will cover everything parents and their children need to know about cosigning a home loan.

What Is a Cosigner on a Home Loan?

A cosigner is someone who legally shares responsibility for repaying a home loan with the primary borrower The cosigner promises to make the monthly mortgage payments if the primary borrower cannot

Cosigners can be parents, grandparents, siblings, close friends, or anyone willing to take on the financial risk. They do not need to live in the home or be on the title. Their income, assets, debts, and credit history will all be considered by the lender when approving the loan application.

When Do Homebuyers Need a Cosigner?

There are a few common scenarios when a homebuyer may need a parent or other cosigner for their mortgage:

• The borrower has a low credit score. Lenders view borrowers with credit scores below 620 as higher risk. Adding a cosigner with good credit can help them qualify and get a lower interest rate.

• The borrower has a high debt-to-income ratio. Lenders look at a borrower’s total monthly debts divided by their gross monthly income. If this ratio is over 43%, it can disqualify a borrower or lead to a higher interest rate. A cosigner’s income can help lower this ratio.

• The borrower is self-employed. Lenders may want to see 2+ years of steady self-employment income. A parent cosigner with stable W-2 income can provide assurance.

• The borrower has limited savings. Down payments under 20% often require mortgage insurance. A parent gift can help avoid this added cost.

• The borrower is a first-time homebuyer. Cosigners can provide confidence to lenders who may perceive first-timers as higher risk.

The Pros of Cosigning a Home Loan as a Parent

Here are some potential benefits for parents who cosign on their child’s mortgage:

• Higher approval chances. Adding your good credit and finances significantly improves your child’s loan qualifications.

• Lower interest rate. Your child can qualify for lower mortgage rates thanks to your credit score and debt-to-income ratio. This saves thousands over the life of the loan.

• Larger loan amount. Your combined income allows your child to qualify for a larger loan and more expensive home.

• Avoid mortgage insurance. Your gift funds can help your child make a 20% down payment and avoid costly monthly mortgage insurance payments.

• Teach financial responsibility. Cosigning can be an opportunity to teach your child about making payments on time and meeting financial goals.

• Family support. Cosigning enables you to provide your child and grandchildren the joy and stability of homeownership.

The Cons of Cosigning a Home Loan as a Parent

While cosigning a home loan can greatly benefit your child, it also comes with serious drawbacks to weigh:

• Legal obligation to repay. If your child misses payments, you are responsible for making them. This could impact your own finances.

• Credit damage. Missed payments will hurt both your credit and your child’s. A foreclosure can stay on your credit report for 7 years.

• Relationship stress. Financial issues are a common cause of family strife. Expectations and resentments around the cosigned loan could strain your relationship.

• Less borrowing power. The new mortgage debt will count against your own ability to borrow money until the loan is satisfied.

• Difficult exit. Getting removed from the loan typically requires refinancing which your child may struggle to do alone.

• Fees and penalties. You may have to pay late fees, legal fees, and collection costs if your child stops paying the mortgage.

• Personal liability. If the loan goes to foreclosure, lenders can sue you personally for any losses on the mortgage balance.

Steps to Take Before Cosigning a Home Loan

Cosigning a mortgage is a major commitment. Follow these steps to approach it carefully:

• Review loan details thoroughly. Understand the loan amount, interest rate, fees, monthly payments, and loan term being requested. Make sure the home price and loan size are reasonable.

• Assess your child’s finances. Look at their income, debts, spending habits, job stability, and savings. Are they financially ready for homeownership? How much can they reasonably afford in housing costs?

• Discuss expectations upfront. Set clear expectations about who is responsible for making on-time monthly payments. Will your child make payments directly or send money to you? How will household maintenance and repairs be handled?

• Consult an attorney. Discuss the cosigner agreement and your rights. Add personal liability protection if possible.

• Get added to the mortgage account. Request notifications if a payment is ever missed so you can take swift action.

• Have an exit strategy. Ensure you can financially handle the monthly payments on your own in case your child is unable to pay.

Alternatives to Cosigning a Home Loan

If you are hesitant about putting your name on your child’s mortgage, here are two options to still help them become homeowners:

1. Provide a down payment gift. Gifting funds for a 20% down payment can help your child qualify without needing a cosigner. Be sure to formally document the gift funds.

2. Take out a separate co-ownership loan. You can jointly apply for the mortgage under your names as co-borrowers and co-owners. This gives you rights and direct access to the home equity.

Answers to Common Cosigner Questions

Here are answers to some frequently asked questions parents have about cosigning on a child’s home loan:

Can I be removed from the loan later?
The only way to be removed is through refinancing. Your child must qualify for the new loan solo.

What FICO score is needed to cosign?
Many lenders require a minimum score around 620-650 to be a cosigner. The higher your score, the lower the rates your child can qualify for.

Can I cosign if I’m already on my own mortgage?
Yes, but your total monthly mortgage payments will be considered when assessing your debt-to-income ratio.

What cosigner income documentation is needed?
Expect to provide pay stubs, W-2s, tax returns, and bank statements to validate your income, assets, and overall financial health.

Can I stop making payments if my child misses them?
No. As a cosigner, the lender can seek payment from either you or your child when payments are missed.

Is a cosigner’s spouse also liable?
Typically no, unless the spouse cosigns the loan too or lives in a community property state. Otherwise, liability resides solely with the cosigner.

Can I cosign if I’m retired and living on Social Security?
Lenders may view fixed Social Security benefits as qualifying income, but your overall finances will be closely reviewed.

The Bottom Line – Weigh Your Decision Carefully

Cosigning a home loan is one of the biggest financial favors parents can provide. While being a cosigner allows you to help your child achieve the dream of homeownership, take ample time to consider all the risks involved. Have open and honest discussions with your child to set proper expectations. Explore alternatives that can allow you to support them while protecting your own finances. Approach cosigning thoughtfully and deliberately, as you would any major financial commitment.