Protecting Yourself When Co-Signing A Loan
REM # F584
By Ilyce R. Glink
Summary: Ilyce helps a mother think through the issues of co-signing or securing a loan for her daughter. There are options the mother can exercise to provide her with financial security.
Q: My 38-year old daughter has owned and operated her own day care facility for two years. The business is doing well and providing a good living for her family. Her husband works also, but I don’t think he contributes much to their living expenses.
They recently moved into an old house on the same property as the day care, renovated it and will be living there indefinitely. She has the opportunity to buy the house, the building that houses her business, and one acre of land on a major highway in Arkansas for $118,000.
I think the property is worth the asking price, so there isn't a problem with that.
However, my daughter has a bad credit history, although she has really taken charge of her finances during the last few years. She needs me to co-sign or secure the loan for this purchase. I need some professional advice on how we should handle this transaction to protect both of us.
The bank is working with us on getting the application started. Can you tell me how we should do this?
A: If you’re going to help out your daughter, and you want to be protected, you and she should have some sort of agreement that spells out your financial arrangement.
It could be that you and she each purchase 50 percent of the property, rather than you simply lending her your good credit score. That way, your signature is backed up by some ownership of the property.
If you do co-sign the loan, whether or not you have some ownership of the property, you have to recognize the danger to your own financial situation. While your daughter appears to have turned around her life, she may have another spell of bad luck. If you co-sign her loan and she starts missing payments, the lender will come after you. Whether or not you can afford them won't be the issue. Your credit will also be tied to your daughters, so you could wind up even bigger problems.
If you feel like your daughter is ready for this, and can financially manage her affairs, co-signing the loan might be less risky for you. But you should make sure you understand the financials of her business so that you know whether or not this property is too big a leap at this time.
Finally, if she can't afford it, but you think it's a good investment, you could always purchase the property on your own and rent it to her until she is financially strong enough to purchase it down the line.
You need to sit down with a real estate attorney and possibly your tax preparer to make sure you’re thoroughly protected – just in case.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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