As mortgage lenders limit how much money they will lend and to whom, co-signing home loans is growing in popularity.

“Co-signing” a home loan is when a third-party — usually a parent or relative — promises to make repayments to the bank in the event that the borrower falls behind on his obligations.

Money experts usually advise against co-signing notes because of the long-term financial risks, but people still do it for a number of reasons including “wanting to help”.

If you’re thinking about co-signing a home loan for a friend or loved one, it’s important to consider the implications of sharing credit with another person. 

The four questions below may help you with your decision:

  1. Why can’t the borrower get approved on his own?  It is because of poor credit ratings?  Lack of income?  History of foreclosure?
  2. If the borrower stops paying the mortgage, can you afford to make the full payment due each month?
  3. If the borrowers defaults on the mortgage and doesn’t notify you, how will a foreclosure on your credit rating impact your family finances?
  4. When the co-signed loan appears on your credit, will the debt load prevent you from getting approved for your own loans in the future?

Not only can a co-signed home loan create serious financial burdens, but it’s a long-term commitment, too. 

Once the note is co-signed, the only way to separate the signers is terminate the note entirely.  The two ways to accomplish that are to remortgage the home out of the co-signer’s name, or to sell the home and retire the debt.

Co-signing on a mortgage is not “bad” but bad things can happen should the primary signer face personal and/or financial difficulties.  Before agreeing to share credit, consider the implications should something go wrong.

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