Millennials are finding it difficult to purchase a home.
Young adults with low incomes or poor credit histories are often asking their parents for help by co-signing on their mortgage. This is becoming a growing trend. The share of co-signed mortgages has risen from 13.7% in 2015 to 17.4% in 2018, according to ATTOM Data Solutions. Currently, millennials are far behind in home ownership compared to previous generations. Student debt and stagnant incomes could share some of the blame. Higher taxes are a contributing factor as well. Currently, millennials average 78.2 cents for every dollar.
Nearly half of millennial homebuyers report carrying student loan debt, with a median loan balance of $25,000. Loan officers have to take a borrower’s total debt picture into account when running an application and are finding it increasingly hard to qualify buyers for a mortgage with large student debt. When Millennials are unable to get approval for a mortgage, it is common to seek out a co-signer. Co-signing a child’s mortgage loan is a serious decision, and parents should weigh all of the risks before making any promises. Here at Fairway Independent Mortgage, we have deferred to financial experts to weigh out the pros and cons of co-signing in order to make an informed decision:
If they need a co-signer, it likely means they cannot afford the house they are buying.
As a co-signer, you are taking on the brunt of the risk. As a co-signer, you are responsible for the payments if the person you have co-signed for can no longer make them. “There’s no separation of who’s responsible for the debt,” Boutcher says. “They’re both equally responsible.” As a co-signer, your own credit and ability to borrow your own money is impacted if the borrower misses a payment.
You may also want to consider the life of the loan. If you’re planning to retire during the life of the mortgage loan, co-signing is an even larger risk, as you may be living on a fixed income. By co-signing, you effectively take on a risk the bank doesn’t want. And the list of potential scenarios in which your child may no longer be able to afford their house payments can be vast.
Bottom line: If you wouldn’t be able to comfortably afford the payments in case that happens, don’t co-sign.
You might need to forego some of your future plans
Co-signing adds to your own debt, making it tougher for you to qualify for additional credit. Maybe you had plans to fund that month long vacation or even purchasing a vacation home? Don’t overlook that a lender will have to factor in your child’s mortgage as part of your overall debt-to-income ratio when you apply for future financing.
Your relationship with your child could change
Co-signing for anyone is bound to change the dynamics of your relationship. Your financial futures will be entangled for however long it will take him/her to pay off the mortgage. How strong is your relationship on a communication level? If your child is unable to understand if you tell him/her that you are unable to assist and it places a strain on the relationship – you have dodged a bullet.
Similarly, you should consider how your relationship would be affected if somehow your child ends up defaulting on the mortgage, leaving you to make payments to the bank. Therefore, take a closer look at their finances to be sure they are financially mature. Don’t be afraid to ask about their income and spending habits. You should have a good idea of how your child handles their own finances before you agree to help them.
Fairway Independent Mortgage Suggestions
If you are a parent and you wish to help your child by co-signing on a mortgage, maybe offer the down payment as a gift. If you have an inheritance waiting for said child, reduce the down payment gift from there. Or, instead of gifting a down payment, use it to pay off their debts to improve their credit rating and place them in a better position for loan financing.
Contact Michael Dunsky today and discover the BEST avenue for your child’s mortgage, and ways you can help.
Yes, I would LOVE to learn more about mortgage options to help my millennial finance his/her home!