What are the implications of becoming a cosigner on a mortgage?
March 5, 2005 9:52 AM   Subscribe

My parents asked me to become a cosigner on their house purchase (they don't have enough credit to get the house themselves). I am fully willing to accept the financial responsibility, but am wondering if there are any hidden caveats (especially with regard to IRS) that I should be aware of?

I am currently renting a place, and have no intention of becoming a homeowner in the next few years. I also have a good job that affords me enough income/credit to buy the kind of place my folks want by myself, if I wanted to.

My parents do not have the credit needed to get the house they want (and since my mom is a mortgage broker, I know that she has explored every opportunity available), but they do have the ability to make monthly payments on the property. So they are asking if I'd cosign the loan with them. I trust them with financial matters completely, and am willing to shoulder the responsibility in the unforeseen events (e.g. if they become unable to pay mortgage for some reason, I have the savings to keep it floating for a while). What I am wondering is:

1) Are there any negative tax implications for me at the time of purchase?
2) Suppose I want to get my own house at some point down the road. My mom tells me that I can simply "take my name off the title" than. Is that really right, or would I have to arrange for a sale of my portion of the house, and pay fair-market tax on it?
3) I have a certain inkling of intention of quitting my job and going to grad school within a couple of years. This will almost certainly signal a transition from middle class to first hemorraging the savings and than living on loans (been there, done that, willing to do it again). Will being a part-homeowner hurt me somehow? Make me ineligible for financial aid?
4) I realize that the sort of advice I am seeking might best be asnwered by a lawyer. I have no idea, however, of how to look for someone that specializes in real estate tax law. Any ideas? I am in WA state if that matters.

Thanks in advance AskMeFi!
posted by blindcarboncopy to Law & Government (14 answers total)
Hoo-boy. Just to clarify, why exactly are your parents buying a house if they can't get credit for it?

I can't answer all of these questions (and I highly recommend that you consult a professional financial advisor or lawyer), but some thoughts:

With respect to (2), transferring your name from the title doesn't make a damn bit of difference. You are still liable for loan as long as your name is on that.

With respect to (3), It depends on the type of grad school. Would you being going for an academic degree (i.e. a PhD)? If so, most PhD programs offer assistantships -- basically a low-paying job doing teaching or research. You shouldn't have to take a loan to pay for a PhD (in fact, you should turn down any PhD program that doesn't offer you such assistance in most fields). If, on the other hand, you are going for a professional degree, say in business, law, or medicine, then you probably need loans to pay for it. In that case, your credit history may be relevant.
posted by casu marzu at 10:39 AM on March 5, 2005

you can find lawyers either through your local bar association or through martindale-hubbell. the recommendations won't be as candid as personal recommendations from friends, but they will be backed by peer review, which is something. mortgage brokers are also a good source for real estate attorneys.

sorry, but i don't know anything at all about your other questions, other than that casu is right: there's an enormous difference between being on the title of a house and being on the loan papers for the house.
posted by crush-onastick at 10:46 AM on March 5, 2005

Response by poster: My parents don't have the credit to buy the house because of an entirely unavoidable personal bancruptcy due to medical issues. They are very, very good about money otherwise, but with medical system in this country being what it is, sometimes you have to go bancrupt if you want to stay alive.

Thanks for all the answers so far. casu marzu, do you happen to know if being on a loan for one house will make it difficult for me to buy another house for myself if I ever wanted to? (I am guessing yes).
posted by blindcarboncopy at 10:59 AM on March 5, 2005

Response by poster: oh and regarding grad school, it'd most likely be a professional M.S. degree, so I expect to be paying at least some money for it. Although an academic path is not out of the question either.
posted by blindcarboncopy at 11:01 AM on March 5, 2005

Re: getting another mortgage loan when you already have one.

The lender I used to work for would take into consideration (with proof) that someone else is paying for the first mortgage. However, they would keep in mind that if that goes south, you will be liable for both mortgage payments. It would, basically, come down to your income-to-debt ratio (would you be able to make both payments if necessary).

Re: income-to-debt ratios. Every lender has their own guidelines as to what is acceptable. A lot of it would depend on what kind of mortgage you wanted (fixed, adjustable, FNMA, etc.).

Re: the bankruptcy. How long ago was it? Have they reestablished any credit? If so, how much, how long ago, and how good is their payment history? If the BK was at least two to three years ago and they've reestablished credit, there are lenders that will take them on (provided everything else is within the lender's guidelines).

on preview: I reread your post and realized that the loans you may be looking for are not mortgage loans. However, most of what I said still stands, especially the income-to-debt ratio stuff.
posted by deborah at 11:21 AM on March 5, 2005

You could only be removed from the loan through refinancing. You should talk to your parents about the empotional issues. There are plenty of pitfalls, but it should be manageable.
posted by theora55 at 12:11 PM on March 5, 2005

The problem with refinancing is that it is a new loan (which pays off the old loan). If your parents can't get this loan independently, most likely they can't the refinanced loan either -- at least not until the bankruptcy mark clears. It really isn't as easy as transferring a title.
posted by casu marzu at 12:19 PM on March 5, 2005

There are at least two risks here. First, as discussed, if your parents were to encounter difficulties in making payments, you would be more-or-less forced to help. Second, if your parents were to sell the house (for example, one of them became ill and went to a nursing home), and the value of the house was not sufficient to pay off the mortgage, then you would be liable for the difference. The likelihood of the second depends a lot on the part of the country your parents live in (have house prices risen a lot there?), and whether or not housing prices really are in a bubble of some sort in some places in the country (for example, most of California).

Personally, I'd put this in the category of "my parents have done a lot for me, and now it's time for me to do something for them", since I don't see the risks as overwhelming, but that's a personal opinion, of course.

And it's not at all clear why you would want your name on the title of the house. If you end up making payments and want to (eventually) recover the money when the house is sold (hopefully), you could (should you end up helping with payments) ask your parents to sign some sort of prommisory note.
posted by WestCoaster at 12:28 PM on March 5, 2005

This seems like an excellent question to bring to a good tax accountant. Since you're comfortable with even carrying the loan individually if necessary, there are probably better ways than a co-sign to structure the purchase for maximum benefit all around. There are big tax breaks for gifts to family members, mortgage interest, etc. (purchase through a family trust?). Optimizing the tax issues could free up a bunch of extra money for accelerated replayment of the loan, and/or toward a downpayment on your own house.

As for buying another house later, don't forget that lenders LOVE people who've shown a good history of carrying debt. The bigger, the better. The longer, the better. So having your parents' mortgage on your credit report for a while isn't necessarily a bad thing at all. You do need to watch out for the debt/credit ratio, but it sounds like you'll have plenty of time to adjust that (i.e. get off the loan papers) before applying for your own mortgage.
posted by nakedcodemonkey at 12:41 PM on March 5, 2005

There are many caveats--legal and psychological. I suggest one of two basic alternative:
1)Proceed with reasonable prudence,consult an attorney and accept the fact that cosigning is a act of generosity that puts the onus on you to accept full financial and emotional responsibility if something goes wrong-
2) Structure this as a business deal that if something goes wrong your risk and potential exposure is preserved in the form of equity and future control--this can be done in numerous ways with the help of an attorney--
I would strongly encourage you to pursue the latter as it treats both you and your parents as responsible parties and separates some of the potential emotional entanglements--if they feel uncomfortable with the your (and the lawyers) recommendation it should raise red flags for you--you should not be the one putting themselves at risk with out an equal opportunity for reward--trust me--prudent business practices are often the best route for maintaining the strength and love in family relationships--just as the had little control over their past financial hardship neither you nor they can predict the future--My Best
posted by rmhsinc at 3:29 PM on March 5, 2005

Without going into details I watched a friendly real estate transaction in my family--one sister helping another buy a first house--meltdown over a period of years into an incredibly acrimonious situtation that basically destroyed the relationship between two people who had been very very close for decades.

Why'd it happen? IMHO it's because there wasn't a written, legal contract that clearly spelled out who was doing what for whom. I suggested this at the time when there was NO inkling that anything bad could ever happen and the response was "this is family, we don't need a lawyer, that's ridiculous." Years later different memories each recalled slightly differenet versions of events and the agreements that had been made. And each party was COMPLETELY sure they were right and the other was wrong and, well, things turned into a shit sandwich pretty quick.

SO I'd implore you to consider getting a simple document written between you and your parents that clearly states what the plan and intent is here. An then continue to happily help them get a house.
posted by donovan at 3:38 PM on March 5, 2005

Two things I want to mention here...

1) If this is your first mortgage it will disqualify you from ever getting a "first time home buyer" loan. For what it's worth, you'll loose that option. I don't know if you can use this to your advantage though and get a "first time home buyers" loan for this purchase though, ask a mortgage broker.

2) You shouldn't get screwed on the financial aid aspect HOWEVER you would get screwed if you ever wanted social services such as food stamps or something like that. Most of these programs don't care so much about home much money you have in the bank or how much your pay is but rather how much assets you have.
posted by pwb503 at 3:39 PM on March 5, 2005

One of the potential advantages of getting your name on the title (and just leaving it there if you can swing it) is you can avoid paying estate tax on half the value of the house.
posted by Mitheral at 4:31 PM on March 5, 2005

A friend approached me recently about borrowing money. He told me about a company called circle lending ( easy to find with a google search) I have only done a minimal amount of checking into them but what I have seen so far seems good. They facilitate private lending, especially between family members. The transaction can be reported to a credit company to build your bona fides...
posted by flummox at 7:36 PM on March 5, 2005

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