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Getting a mortgage can be tough for anyone. This is especially true in certain markets across Washington, Oregon, Idaho, and Colorado where prices are well over the statewide median. But for first-time homebuyers or young adults, buying a home can be even more difficult.
It can be hard to convince a lender that a young person is ready to buy a house. There may not be a long credit history, a lack of assets might make it hard to fund a down payment, and the buyer’s age can cause banks to hesitate. This can throw a wrench in a person’s dreams of buying a home and becoming a homeowner.
But there are some ways around this issue. One of the ways for parents to help with this process is to co-sign on the mortgage. Before doing this, there are a few important steps to keep in mind.
Remember that co-signers are going to go through the same vetting process as the primary borrower. This includes your income, credit history, assets, debts, and credit score, all of which will be scrutinized. It might be a while since you’ve had to go through the mortgage application and approval process.
Be sure to take a look at your own qualifications. In order for you to successfully be able to serve as a co-signor, your financial health will be scrutinized by the lender. As such, you will want to make sure that your income, assets, debts, and credit score are all in order first. If not, you may be out of luck. Otherwise, you may want to take some time to improve your own financial profile before considering being a co-signer for anyone.
Remember that any mortgage, including acting as a co-signer, will act as an outstanding debt. As such, you will be adding more debt to your current pile. Even though your child is buying a home in WA, CO, ID, or OR, your name is on the mortgage. And as a result, this debt will be included in your overall debt.
While some debt is fine, too much can put a damper on your credit. If your debt is so high after co-signing that your debt-to-income ratio is significantly compromised, then you might want to reconsider being a co-signer. The added debt might make it hard for you to refinance in the future.
The point of being a co-signer is that you are basically guaranteeing to make the mortgage payments if your child is no longer able to willing to make the payments themselves for whatever reason. The mortgage lender is agreeing to extend a mortgage to your child because you are promising to take over in case your child defaults.
While nobody wants to think about their child being unable to pay back the loan, there is always the chance that this may happen. Therefore, think about what would happen if you need to step in and make these payments. If you cannot handle the burden of having that additional co-payment, you may want to think twice about co-signing. Failing to make these payments will not only hurt your child’s credit score but yours as well.
As a co-signer, it will be important to protect yourself before signing on the dotted line. First, be sure to do some estate planning with your child. You should encourage your child to take out a life insurance policy.
While no parent wants to think about burying their child, if something happens to him or her, the co-signers are going to be on the hook for the rest of the loan. Furthermore, be sure to monitor the loan payments as well. Sign up for email or text alerts to make sure payments are being made on time.
Many parents are going to reflexively act as a co-signer for their child; however, it is important to plan ahead. Be sure to think about all possibilities and make sure that both you and your child are ready to handle an added loan payment. Being proactive and thinking of all the possible outcomes of what may happen in the future is essential.
This will protect both yourself and your child. As an example, if your goal is to have your child refinance you off of the loan when they are able to qualify on their own, you need to be prepared to pay excise tax in many places around the country such as Washington State. This tax can run several thousand dollars depending on the size of the mortgage, so it’s something you want to prepare for ahead of time.
If you are interested in buying a new home or refinancing your current property in Washington, Oregon, Idaho, or Colorado, be sure to consult with your trusted home mortgage professional.
If you’re curious about home loans in Washington, Oregon, Colorado, or Idaho, Sammamish Mortgage can help. We are a local mortgage company based out of Bellevue, Washington that has been serving the Pacific Northwest since 1992. Our mortgage financing experts will explain all the mortgage programs that are available to you. Contact us today with any questions you have about home loans.
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