To co-sign or not to co-sign, that is the question.

In the event a friend or relative comes to you and asks you to co-sign a home loan for them, what should you do?

Perhaps you want to be supportive and stay on good terms with them or maybe you just like doing favors. However, when you co-sign on a loan, you must understand what you are getting yourself into. Even if you completely trust the person you’d co-sign for, accidents happen that one cannot plan for. The last thing you want to happen is to compromise your own financial status if the debtor cannot make the payments.

Whether the person you are interested in co-signing for doesn’t have bad credit nor has no credit at all, keep in mind the lender doesn’t trust his ability to pay the loan back, thus requiring you to co-sign. Did you know the Federal Trade Commission reported that 75% percent of all co-signers end up having to repay the loan? Think twice before co-signing.

You may be tempted to co-sign on a home loan to support a friend or relative who is in the process of buying a home.  Suppose you co-sign and the debtor misses a payment.  In many cases, the lender will approach you, the co-signer, first to collect the payment without attempting to collect from the borrower. With this being said, you may have to pay fines such as late charges or legal fees. You may have to disclose your assets and you could possibly lose your property. In the worst case, you can also be sued.  This will not only scar your credit record but prevent you from getting future credit for your own personal needs.

co-signIn many cases parents will help out their children who are buying a home and have not yet established credit. No matter what the reason, make sure you will be able to afford to pay back the money if the borrower defaults on the loan. Don’t jeopardize your own financial security and credit record.

If you do decide to co-sign the loan, request documentation from the lender which states you will only have to pay the principal balance of the loan if the borrower defaults. By doing this you avoid having to pay an attorney’s fees if the lender wants to sue.

Another good idea is to have the lender agree in writing to tell you when the debtor is behind on a payment. This will give you a head start in preventing a possible default situation from snowballing.