As parents, most of us would do anything to help our child, even when that child is already grown. A fairly common request from many grown children is asking their parents to co-sign for a loan, particularly if it is their first time getting a credit card or applying for a home loan. Home loans can be co-signed by almost anyone, but most borrowers prefer a co-signer, or guarantor, to be someone they know well. This is in part because they are trying to build up their credit or improve their credit score, and they realize they cannot ask just anyone for this favor. Also, no one plans to default on a loan, but when this does happen, people usually feel better if it is their parents who take over the loan, because the parents are more likely to be interested in helping them and to continue making the payments. When deciding whether or not to co-sign your child’s home loan, below are a few things to take into consideration.
Know the Basics Before Co-Signing a Loan
First of all, not all lending institutions accept guarantors on home mortgage loans, so doing your research is always a recommendation. Secondly, you should consider your alternatives to determine whether you should co-sign the loan or instead provide them with the down payment. If your child can afford the monthly payments but doesn’t have enough saved up for the down payment, it may be financially advantageous to provide the down payment instead of co-signing. This way, they may be able to obtain the loan without your help, and if they do default later on, it will not affect your own personal credit score because all you have done is provide them with a down payment.
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Providing your child with the down payment also lowers both their monthly repayment amounts and their interest rates, so this option helps your child as well. In addition, if you do not have enough cash for their down payment, you can always take out a second mortgage to pay for it. This is actually a preferred action for many parents whose children are taking out a loan and need them to co-sign.
Other Things to Consider
One of the main things to keep in mind if you co-sign for your child’s home mortgage loan is that the commitment you make is long-lasting. Most mortgages are thirty years in length, and if your child makes payments faithfully for twenty years but then stops making payments, even if it is through no fault of their own, you will still be held responsible for making the payments for them. This could be a real hardship because by this time, many parents are retired and on a fixed income.
Regardless of what you decide in the end, one thing is certain – guarantor loans should not be taken lightly by either party, but especially not by the co-signer. All guarantor loans should be thought out carefully and all aspects of the loan should be considered before making a final decision. Otherwise, the risk of these types of loans can simply be too great for everyone concerned.
