Buying a home is increasingly expensive. And as housing economists know so well, for every dollar rise in the price of homes, a group of home buyers gets priced out of the market.
While low interest rates certainly help more people to qualify for a home loan, interest rates won’t always be low. Another popular way to qualify to buy a home is by sharing someone’s buying power. It’s called borrowing a signature or lending a signature, or co-signing, and the concept is also used for renting an apartment, buying a car, or getting a first credit card.
When Carole and Marco wanted to buy their first home, a $120,000 two-story bungalow outside of San Diego, they went to Marco’s brother and his wife and asked them to co-sign the loan. The two families agreed to share the house and expenses, with the understanding that a few years later, they would pool their money again and help Marco’s brother and his wife purchase their own house.
Five years later, both families are living in their own homes, down the street from each other. Their credit is intact, and they are each able to make their own mortgage payments.
How much is a signature worth? If it’s Monet’s and it’s on a painting called “Water Lillies,” it may be priceless. If it’s yours, and you co-sign a loan for a friend, your signature could be worth everything you own – your home, bank accounts, stocks, possessions, and good credit history.
There are pleasures in co-signing a loan for a friend or relative. It feels good to give a deserving someone a leg up, then watch them grow financially strong enough to stand on their own. On the other hand, there are some serious consequences for you should that person topple and fall.
What most folks don’t realize is that co-signing a loan makes them entirely responsible for paying off the debt, should the landlord, credit card company, or mortgage lender not be paid. In other words, if your best friend co-signs your loan and you fail to make the mortgage payments, the lender will turn to your friend and demand those payments. If your house burns down and you don’t have enough homeowners insurance to cover the mortgage, your friend’s pockets had better be plenty deep.
If you co-sign for a home purchase, your name will usually need to go on the title as an owner of the property. Your credit report will list the mortgage as a debt, and should your co-signer get into financial trouble, his or her creditors could come after everything you’ve worked hard to build.
So what can you do? If you don’t want to say no, think it through carefully:
How well do you know the person? Is it your brother who’s asking, or a friend you don’t know all that well. Is this someone you can rely on to come through?
Ask to see a copy of his or her credit report? What kinds of credit problems does your friend or relative have? Is this purchase going to be a repeat performance and mess us your excellent credit?
Will you need to apply for in the near future? If you lend your signature, it might be more difficult for you to go out and get your own home or auto loan.
Finally, ask yourself what kind of a lender you’ll be. Will you be constantly harping on your friend or relative to see if the bills and mortgage have been paid? Or will you relax and not think about it?
Losing the ability to sleep at night is one excellent reason to decline to co-sign a loan.
Published: Jun 22, 1998