Cosigning a Mortgage for Your Adult Child

Saving for a home

Many parents cosign their children's mortgages. Often, it goes well, and the parents are happy to have given their adult kids a boost. Sometimes, though, it goes badly. Not everyone should cosign a mortgage for their child, and certainly not before considering a few key factors.

 Should You Cosign a Mortgage for Your Child?

Consider a few things before cosigning a house for your child. For example, could you genuinely afford to pay the loan on top of your own mortgage and expenses? The wrong answer to this question is, "My child won't miss payments, so it's not something I have to worry about."

1. Cosign if You Can Afford Mortgage Payments on Top of Your Current Expenses

You never know what is going to happen. Even if your child is the most hardworking and honest person you know, people lose jobs, get hurt, or otherwise fall behind on repayments through no real fault of their own.

If you are asking literally, "Can I cosign a mortgage for my child?" then some parents cannot. Their credit may not be good enough or their income high enough.

2. Think Through the Repercussions if Your Child Doesn't Make the Payments

What would you do if your child stops making payments? Some parents turn a potentially bad situation into a good one, for example, by renting the house, turning it into a vacation rental, or selling it for a profit.

The house could make a good investment if payments go south but talk with a real estate agent first. Discuss the forecast for housing prices in the area and the house's potential suitability for renting or Airbnb. How much might it command in five, 10, or 15 years if it sells?

Conversely, late payments and foreclosures will cause your credit score to decline. Also, your debt-to-income ratio will increase, which will reduce your purchasing power for your own personal investments.  

Perhaps most importantly, missed payments can influence the relationship between you and your son or daughter. Do you want to constantly nag your child for money? Would you resent your child for dealing you a huge financial blow? Even in the best of situations, this type of financial arrangement can cause tension in a relationship.

3. Understand Your Reasons for Doing It Before You Cosign

Cosigning might not be the best idea if you do it primarily to get your child out of your current house. There are other ways to accomplish living separately than putting your life's savings at risk. Cosigning on a house for your child is not great either if you do it because your child has badgered or guilted you into it.

If you want to cosign because your child works hard but does not make enough money yet, housing prices are out of your child's reach, you can easily afford it, or you were going to buy an investment property anyway, these could be good reasons. Only cosign after having thought through the decision carefully.

4. Weigh the Alternatives to Cosigning

Even if you can easily afford to cosign and are happy to do so, consider the alternatives. They could include the following.

  • Purchasing the home, yourself and renting it to your child. This way, you are in complete control. Your child can buy the home from you once he or she has the down payment money or credit.
  • Gifting the down payment or closing costs. Springing for these costs is a valid alternative to cosigning if it allows your child to be the only person on the mortgage loan.
  • Offering a loan. You would buy the house and then set up a loan with your child akin to a bank loan. This differs from buying the house and then renting it to your child.

Cosigning a mortgage for your adult child has the potential to go extremely well if you do it for the right reasons. You must be able to afford the mortgage and understand the consequences if your child misses payments. Get an accurate picture of your financial situation and consider outside perspectives to weigh in on your child's ability to make timely payments.

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