Can co-signing for my kid's mortgage keep me from getting one myself?

What are you agreeing to when you co-sign on a mortgage loan application?

Co-signers are used to bolster marginal applications for home loans--for example, if the applicant doesn't have a long employment history or has not used credit before, a co-signer could make the loan less risky. But co-signing is not just a nice thing to do or an expression of love between family members. Co-signing on a mortgage means that if the borrower defaults, you are on the hook for the mortgage balance.

Beyond default--the implications of contingent liability

So, if you are sure that your kid would cut off her right arm before defaulting on a mortgage, it should be okay, right? Maybe not. Even if your child doesn't come close to defaulting, there is another consideration. It's called contingent liability, and it means that lenders treat you (at least at first) as though you are in fact obligated on your daughter's mortgage. They don't know about the right arm thing and that she's a rock solid citizen. This means that if you apply for a mortgage, the lender includes your daughter's mortgage payment in your debt-to-income ratios, and if you can't afford both mortgages, you don't get approved for yours. How can you get around that? By providing at least twelve months of canceled checks showing that your daughter does make the mortgage payments. So at best, you have to wait a year before applying for your own mortgage.

Credit reporting headaches

What if, heaven forbid, your child is flakier than Granny's biscuits? Any time she pays her mortgage more than 30 days late, it could show up on your credit report. And drag down your credit score! Most lenders tell you that mortgage accounts carry the most weight with credit scoring models. A missed mortgage payment can do a lot more damage than a late credit card payment. So your own score could dive and credit could be a lot harder to come by in your future, and it could cost you a lot more too. So, if the reason that your daughter can't get a mortgage without a co-signor is that her own credit is damaged, I'd be very cautious about putting my financial reputation in her hands.

Alternatives to co-signing

If your daughter is a dependable sort who just needs a little help, consider contacting lenders about FHA mortgage quotes, community home buyer programs, and first time buyer assistance. She may be able to get an FHA mortgage with only 3.5% down or a community home buyer loan with 3% down. And some of that can be gifted from family members or through non-profit or government organizations. Helping her out in this way may be better for your relationship with her as well as your financial well-being.