Decent credit, high income levels and stable employment make you the perfect candidate for cosigning a loan. When a bank is not willing to issue a loan to an applicant, the applicant often finds a cosigner who qualifies for the loan. The cosigner guarantees payment on the loan to ensure the applicant gets the mortgage approval. As cosigner you take on significant risk to your credit score and financial portfolio, so you should consider alternatives.
Often a lender will issue a loan if the applicant increases the down payment on the property. By increasing the down payment, the lender takes on less financial risk making the applicant more likely to receive an approval. If you have the financial reserves, gift the money to your close family member or friend. Gifting money makes sense if you have a personal relationship with the applicant; the lender may allow the borrower to use gift funds from family members only, and may require you to sign an affidavit stating that you don't expect repayment.
When you have a less personal relationship, consider extending a loan to the applicant. When you loan money, you get it back over a specified period of time plus interest -- if applicable. Draft up a written agreement stating how much you are loaning, how much you are charging interest and the term of the loan. Make sure the recipient signs off on the paperwork before you provide the money. With a written loan document, you can get your money back in civil court if the recipient defaults on your agreement. Just be sure the lender will allow the applicant to use borrowed money to purchase the home.
Help Secure Loan
Cosigners without significant financial reserves may be able to help in other ways. You could help secure a smaller loan for the recipient. Cosigning on a smaller loan helps build the person's credit profile and lowers your total exposure in case the borrower defaults on the loan. Alternatively, you could add the person as an authorized user on one of your credit card accounts to help build his credit. It'll take longer for him to get his mortgage loan, but he will be more likely to qualify on his own without your help.
Traditionally, the cosigner takes on all the risk for the mortgage loan, including not just the amount borrowed but also court costs, attorney's fees and late fees if the borrower defaults. The Federal Trade Commission recommends limiting your total liability to the balance of the loan excluding additional fees. You must get this agreement from the lender in writing. You may also want to get agreement in writing that the lender will notify you if the primary borrower misses a payment.
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