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Co-Signing a Mortgage for Children

Parents go to great lengths to help their children.  As parents get into their retirement years, helping children can backfire and cause problems for the whole family. 

It is no secret that buying a house has been very challenging in recent years.  Cumberland County is the fastest growing county in Pennsylvania, and available housing has not kept up with the growing demand. 

The listed prices for homes have gone up.  It became common knowledge among real estate agents that an offer should be much higher than the asking price.  Buyers have waived home inspection requirements to sweeten their offer.  More recently, the interest rates for mortgage loans have gone up. 

What does an adult child do in this housing market if the child cannot easily get a mortgage?  The adult child may have student loans, credit card debt, unsteady employment, or some other risk factor that makes a mortgage lender nervous about the child’s ability to make monthly mortgage payments.

The mortgage lender may agree to provide the loan only if someone with a much better credit score will co-sign the mortgage application.  This is where the parents enter the picture.  The parents have paid off their own mortgage, have little or no debts, and have a lifetime of savings.  The mortgage company has no worries about getting paid back if the parents sign on to the application to guarantee repayment.

Should the parents have any concern about co-signing a mortgage application for the adult child?  Yes!

If a professional lender has examined the risks and has worries about an adult child’s ability to make mortgage payments, then the parents should be concerned as well.  After all, co-signing the mortgage means the parents will be on the hook if the child stops making mortgage payments.  How would that kind of financial obligation affect the parents’ ability to live on a fixed retirement budget?  What if a parent’s health declines and the parent needs to spend money on a higher level of care?

Here are some suggestions for the parent who is considering being a co-signer on a mortgage.

First, ask whether the child really needs to own a home.  Could the child rent for a while longer, stick to a budget, and save up the money for a house?  Yes, rental prices are also sky high and the parent probably believes in owning and building equity in a home.

But if the parent co-signs the mortgage, there may be a serious strain on the relationship that the parent has with the child.  The parent has to make it his or her business how much the child is spending on restaurants, vacations, and Amazon purchases. Any frivolous spending by the adult child makes it more likely that the parent will be on the hook for a mortgage payment.  Would the parent rather have a child earning equity in a home or have a good relationship with the child?   

Second, consider giving the child a more limited type of help.  Instead of the parent being on the hook for many years, always wondering whether the child will make the next monthly payment, the parent could simply give the child the money for a down payment or closing costs.  This is a significant help to the child without ongoing financial risk for the parent.

Of course, anyone who has read our columns before would know that elder law attorneys worry about gifting.  Depending on the parent’s age and health, giving a significant gift to a child to cover a down payment could backfire if the parent needs long-term care.  Over half the population will need a higher level of care, and Medicaid is the safety net to cover the expense of care.  Gifting is the most common way that middle class parents disqualify themselves from Medicaid benefits.

A third option is for the parents, who have little debt and good credit scores, to get a mortgage and buy the home.  Then the child can make rental payments to the parent until the child can qualify for a mortgage and buy the property from the parent.  Again, long-term care could complicate this arrangement.  Medicaid allows the parent to own a primary residence while having the government pay thousands of dollars every month for long-term care.  But other real estate owned by the parent would have to be sold before Medicaid will pay for care.

Helping adult children poses risks to the parent any way you look at it.  The more Mom and Dad help an adult child, the more important it becomes for Mom and Dad to have a plan to legally protect themselves from those risks. 

If Mom and Dad co-sign the mortgage for the child, have Mom and Dad created an asset protection trust to keep their own property safe from creditors?  Do Mom and Dad have enough money to pay for long-term care in the event of a sudden decline in health?  Consulting with an elder law attorney and a financial advisor would be very wise before committing to help the child in any way. 

Parents go to the ends of the Earth for their children.  Everyone wants to provide the best opportunities for the people they love.  Times are tough for younger people who want to own a home, save money for their own retirement, and live the American dream.  Before the parent steps in to help the child over financial hurdles, a little professional guidance goes a long way to make sure the plan does not backfire. 

Patrick Cawley