Have you been asked by a family member to co-sign either on an auto loan or bigger yet, a home loan? This is a huge undertaking and you are responsible if they don’t pay so are there any other options? Usually, the single biggest challenge for new homebuyers is coming up with the down payment, closing costs, and earnest money deposit’s. This is why FHA loans are so popular with first-time homebuyers as they only need 3 1/2% down payment. But, that 3 1/2% can be a financial gift from a family member making the co-sign option nonexistent. They are also more lenient as it relates to credit to qualify. But, even if an FHA option is not the best, there are other options and co-signing.
Co-signing hits both parties with the same debt and if the total monthly mortgage payment is $2000, both the primary borrower and co-signers will show that debt on their credit report. This could affect the ability of the co-signers to secure any new debt such as qualifying for their own auto loan or mortgage. However, family members can provide financial assistance in the form of a gift. Gifts don’t need to be paid back so they are not counted against borrowers debt. The gift must be given on the requirement that it is not necessary to be paid back. Gift funds must be accompanied by a letter as well as a paper trail of where the funds came from and who they are ultimately going to. Parents or other family members can provide a certain amount up to and including the funds needed to close on a property.
Gift funds can also be provided to pay off the outstanding debt of the borrower. Perhaps it’s paying off an auto loan or student loan, freeing up more cash flow during the month and allowing more cash reserves. Family members may also agree to provide a second mortgage on a property as the first lien lender will want to take a look at the second lien note to make sure complies with state law and subordinates the new first loan.
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Co-signing is a common way the family members can support first-time homebuyers but there are other options. One of the best ways is to talk to a lender with your family members about the options available to them. In Washington state, we have several different programs and down payment assistant options that help first-time homebuyers and low to moderate income buyers get the money they need to close on a home as well as a down payment.
Bottom line is that co-signing on alone is not the only option. There are so many different reputable and appropriate loans out there that won’t get either party bogged down with too much debt, repayment, or credit issues.