Q&A: How cosigning a mortgage loan can bring big risks

Dear Liz: I’ve been self-employed for just over a year. Because of disbursements from a recent divorce, I have enough money to make a 40% down payment on a modest house. My income will easily cover the resulting mortgage payments, health insurance and other expenses, but I’ve been turned down for a loan several times without a cosigner. A family member has offered many times to do this, as the person doesn’t have the means or interest in buying a house anytime soon for various reasons. Reluctantly I am considering it.

This person has a good job but will not be contributing any money toward my down payment or mortgage payments. I plan on setting up a separate shared bank account that will cover at least a year to 18 months of expenses for the home in case something happens to me, so my relative isn’t burdened in any way. I also plan on listing this person as a beneficiary on the mortgage so they could choose to sell the house or live in it.

What would be the tax liability if this happens? What if we become roommates and they pay me rent? Would it be a good idea to refinance in a year or so to remove the cosigner? Would a revocable living trust be a better way to handle this situation?

Answer: The best way to handle this situation is to find a good real estate attorney who can explain your options. Your relative should do the same.

Cosigning a loan would have a lot of upside to you and mostly downside to your relative. Cosigners are equally responsible for the home loan, but they aren’t typically owners of the property.

If you want your relative to inherit the house should you die, you can include her as the property’s beneficiary in estate planning documents or a transfer on death deed, if your state has that document for real estate. (Mortgages aren’t assets, so they don’t have beneficiaries.) If your relative inherits the house, she typically wouldn’t owe taxes unless yours is one of the six states that still has an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania). In these states, closer relatives typically pay a lower rate than more distant relatives or those who aren’t related.

You also could leave a sum of money to pay the home’s expenses for a certain period. That probably would be a better idea than a shared bank account, unless your relative insists on access to such a thing as a condition of the loan. In general, you should minimize financial entanglements with people if you’re not married to them or legally or morally responsible for them.

You probably should try to refinance this loan at your earliest opportunity, rather than leaving her on the loan or inviting her to be your tenant. Even in areas where landlord-tenant law favors the landlord, such a relationship can be tricky. In other areas, you could find yourself saddled with a relative who would be extremely difficult to evict.

Q&A: Co-signing a grandchild’s student loan

Dear Liz: My granddaughter, who will graduate college in a year, has asked me to co-sign her third private loan, which will bring her total debt to $30,000. She needs three people to co-sign. Her parents and the other grandparents have agreed and she wants me to be the third party. I love my granddaughter and trust her intentions, but I really don’t like co-signing a loan for anyone. If I refuse, I’ll really be in the doghouse. Is there any way I could guarantee that I would only be responsible for this loan if the others don’t pay?

Answer: Co-signers are equally responsible for paying a debt. There isn’t a hierarchy. If your granddaughter fails to pay a loan, it will affect the credit reports and credit scores of anyone who co-signed that loan.

It would be unusual for any student loan to require three co-signers. What she may have meant is that her parents co-signed her first loan, her other grandparents co-signed the second and now she wants you to co-sign the third.

In any case, there’s no way to get the guarantee you want. If you’re not comfortable co-signing, don’t. Your family members should be the ones in the doghouse if they pressure you in any way to go along with this scheme.

Friday’s need-to-know money news

co-signer-penToday’s top story: How to keep your identity secure. Also in the news: Automating your way to wealth, what you need to consider before becoming a co-signer, and what to tell your grandkids about saving for retirement.

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