The pros and cons of cosigning

The use of a cosigner can be a powerful tool for increasing a buyer’s spending power.

While there’s a multitude of reasons why a cosigner might be needed during the loan application process, the two most common include a borrower who doesn’t have a good enough credit score, or doesn’t meet the income requirements to qualify for the loan.

A cosigner is usually a family member who doesn’t have a vested interest in the property.

However some organizations, like the Federal Housing Administration, are starting to allow friends, where proof of a longstanding friendship can be documented.

Kristy Furman, a mortgage loan officer for Sunstreet Lending here in Maricopa, has lots of experience with cosigners.

“The process allows you to use someone else’s income or credit score to improve your application and get access to more money,” Furman said.

In a recent study by Intuit and Credit Karma, 38% of Gen Z homeowners said they received financial assistance from parents to buy a home. Boomers tend to be a wealthy generation, whereas their kids are often saddled with student debt, making it harder to purchase a home Furman has seen good results when parents cosign for their grown children.

“In those cases, the parents are well educated on the process. They have a good understanding of what they’re getting into. They know their kids and their spending habits and are aware of the risks.”

But what about the old saying, “Never do business with friends or relatives” — does it apply here?

Taking on the role of a cosigner means taking ownership of the loan.

“If you are a cosigner,” Furman added, “you’ve got to be prepared to make the payment. If there’s a late payment, it’s going to wreck your credit too.”

Damaged credit aside, partnering on a loan can sometimes damage relationships.

The best way to avoid hard feelings is to have everything spelled out in a written contract before the purchase. Include things like how repairs are handled, who pays for upgrades, and most importantly, how the proceeds will be split upon selling.

The children may think their cosigners are gifting them the funds, But parents may expect a return of principal plus interest and a share of the profit, even if they are not on the deed.

Consider having an attorney draft the agreement. Because arguing with family over money is worth avoiding at any cost.

Dayv Morgan is a Maricopa Realtor and owner of HomeSmart Premier.

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