Cosigned Mortgages Make a Comeback

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With credit tightening and lenders getting increasingly picky about who gets a loan, the cosigned mortgage is making a comeback. Here are a few scenarios where a cosigned mortgage makes good sense (and when it doesn’t), along with some tips to get the most out of the deal.

The fact that we’re even discussing a cosigned mortgage loan tells you how tough it is to get bank credit these days. Despite the fact that U.S. banks received billions in Troubled Asset Relief Program (TARP) money in 2008 and 2009, that hasn’t translated into more mortgage loans for U.S. consumers.

According to the Federal Financial Institutions Examination Council, the amount of new loans in the fourth quarter of 2009 made by banks that received TARP money equaled about 25% of the money received in TARP money. Basically, banks held on tight to the money and reduced credit pipelines for potential U.S. homeowners. But that wasn’t the government’s intent when it created the TARP money — the cash given to banks was supposed to open up credit lines and make more money available to U.S. consumers.

Thus the need for mortgage borrowers to explore creative ways to get a loan, and getting a cosigner is near the top of the list.

Of course, cosigning a mortgage has its potential drawbacks. Usually, cosigned mortgage loans involve families — parents who cosign a loan so their young family members can own a home.

But family ties can be shredded if the young homeowner stops making payments and eventually, the bank comes looking for Mom and Dad to make good on the mortgage loan. Once you put your name on a mortgage as a cosigner, you’re just as responsible for the loan as the mortgage holder.

Here are the drawbacks:

  • You're locked in. Once you cosign a mortgage, the only way you can get out is if the loan is completely paid or the cosigner agrees to take your name off the mortgage contract.
  • It reduces your credit flexibility. Even though you’re (presumably) not making mortgage payments as a cosignor, creditors will treat you as if you are. In other words, you’ll find it much more difficult to get a loan. Why? Because banks consider you a higher credit risk.
  • Your credit score could be ruined. If you do fall into a bad mortgage situation, your credit score could easily be at risk. Once a payment or two are missed, your credit ranking will suffer, since your name is on the mortgage contract, too.

So when you do cosign a mortgage loan, tread carefully. Do your due diligence and make sure the party you’re cosigning with is financially solvent. It’s dicey to ask your son or daughter how much they earn, or how much money they have in the bank, but do so anyway. If your cosigner can’t afford the mortgage, or earns a salary that may have trouble meeting a mortgage obligation, then don’t cosign.

If you do cosign for a mortgage loan, make sure you receive the same mortgage paperwork your cosigner does. If past-due notices start piling up, you’ll definitely want to know. But if there is no language in the contract that guarantees you’ll get those notices, too, you could be in for a nasty surprise.

Perhaps the best outcome is to keep your name on the mortgage loan for a few years, until the cosigner builds up enough good credit. Then, you can take your name off the loan, usually by means of a refinancing deal or by asking the lender to requalify the loan.

All in all, cosigning a loan falls into the “necessary evil” category. Do it as a last resort, and make sure you have an exit strategy as soon as possible. There might be no worse feeling than having to pay a mortgage on a house you don’t live in — but that’s always a possibility when you cosign.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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