You sure you want to co-sign?
Your son and his wife are first time home
buyers. They have pretty good jobs and decent credit. He and his wife have their eyes on a home in the same neighborhood as you, but it’s at the absolute top end of their budget. You have dreams of walking to see your future grandchildren, taking them to the same parks as you took your son when he was a little boy, and knowing that they’re in a great place. They see the free unlimited babysitting and being able to raid your pantry after you come back from Costco. It’s a total dream scenario, but when your son isn’t able to put enough down to lower his potential mortgage payment to an “affordable” amount, he comes to you and asks you to co-sign his loan.
He might ask you to sign a personal guaranty, or he might ask you to come on the deed to the new property with him and his wife. Obviously you’re not moving in with them, and you’re not going to have to pay the mortgage, he says. It’s just something the bank needs in order for your son to get mortgage approval, he says.
Here’s another situation: your sister lives in a house that was owned by your parents, who passed away. Your sister took a mortgage but has fallen behind. Now, she’s looking to modify her mortgage but was told that she doesn’t have enough income to support a modification. So, she asks you to pledge a part of your income so that she can use it on her modification application. You’ll have to sign the loan modification agreement that she’ll now get approved for after she’s used your income to bolster her application, but she’s not going to expect you to make the mortgage payments, she says.
So what do you do?
You’re torn. You believe in family and you’re fiercely loyal to those closest to you. You don’t want to disappoint your son and his wife. You’re dreaming about those future grandchildren being so close by. You don’t want to see your sister lose your childhood home to foreclosure with all those memories inside. They say that you won’t have to pay their mortgage payments, and that’s a good thing, especially because you can’t afford to make another mortgage payment plus your own.
That’s the emotional side of the equation. Here’s the business side.
When you sign a contract, you are binding yourself by the written terms of the contract. What anyone, ANYONE, tells you is not relevant. If your son, your sister, the mortgage broker, the banker, if anyone tells you that you’re not responsible for making payment when you co-sign a loan, they are wrong. There’s a rule of law that every law student learns about in law school called the parol evidence rule. The parol evidence rule says that if an agreement between parties is in writing, neither party can introduce any other evidence, oral or written, as to the terms of the agreement. In other words, it’s not a part of the agreement unless it’s in the contract.
I’m not saying you shouldn’t go ahead and co-sign for your son or your sister or anyone else you want. Just know that if that person falls behind, the lender is going to ask you to make good on your promise.
Here’s a real life story. Mom and Dad own two houses, and they decide to gift one of their houses to their daughter and son-in-law. Mom and Dad didn’t come off of the deed, but daughter and son-in-law move in and assume all of the bills. Daughter and son-in-law want to gut renovate the house, but because Mom and Dad own the house, the note and mortgage are in Mom and Dad’s name. After a while, the daughter and the now no-good son in law fall behind on Mom and Dad’s mortgage. There’s default interest (this is a non-owner occupied property, after all), and the indebtedness escalates quickly, to the point that it’s getting out of control. Mom and Dad, instead of finding themselves a foreclosure attorney, they’re making a go of it with their transactional real estate attorney. This is not working out well for Mom and Dad.
There’s the other side of the coin: your son and his wife tighten their belts, take advantage of the free unlimited babysitting that you’re providing, and as their salaries go up, it becomes easier to make their payments going forward. Your co-signing the loan never becomes an issue, and everyone lives happily ever after.
You know your family best. Which one are you going to be?