Question: I’m planning to cosign a home loan for my brother. What’s the best way to insulate myself from unforeseen liabilities? Are there any pitfalls in joint ownership? I’m going to ask them to buy a life/disability insurance in my name. Though I’m not sure if the benefits of paying the insurance outweigh the cost of getting mortgage in their name. I’m cosigning to get them a better mortgage terms. He and his spouse earn a decent salary and want to buy a town house in LA suburb. They have recently moved to US, have less 15 month of credit history and 600+ score. House value: 350K. Income > 90K. Down payment – 10%. Naren, Boston, MA
Answer: Lenders love it when a loan is co-signed. It increases their security. More borrowers than ever are seeking better loan terms by turning to family members or close friends to co-sign loans. All I can tell you is that if your brother and sister-in-law can’t meet the loan payments you are on the hook. There is no way out of it. There is no way to insulate yourself from that obligation. That’s the risk you’re taking.
It’s wonderful that you want to help them out financially. The problem is we live at a time in our history when job security is vanishing, the depth and length of the recession is uncertain and the risk of unemployment unusually high.
I have two recommendations. The first is to question whether it makes more sense for them to continue renting for now, build up their credit and learn more about their new city. They have plenty of time. Home prices are not rising anytime soon. The other suggestion is not to co-sign but to help them out financially. For instance, you can gift to them up to $24,000 a year–$12,000 each–with no tax consequences. But you’re not taking on the legal obligation of the loan.