When co-signing a mortgage, both parties should be responsible and trustworthy.
Are you looking to purchase a house?
Have you gone to the bank and been refused a loan?
Do they demand you have a cosigner?
Did someone in your family offer to be a cosigner?
According to a recent The Los Angeles Times article “How cosigning a mortgage loan can bring big risks,” having a mortgage cosigner involves intentional planning.
In reality you need to consider several factors.
- Whether the relative will live there
- Future refinancing and removal of the cosigner
- Tax liability
- Revocable trusts
Many of these questions deal with estate planning, directly or indirectly.
Your home is an asset.
Since assets are included in the estate of an individual, what will be the estate fate of your home?
What are possible solutions?
Unless the home is in Pennsylvania, New Jersey, Nebraska, Maryland, Kentucky of Iowa, he or she will not owe an inheritance tax.
But what if the home is in one of these states?
An inheritance tax must be paid, but the cost will be less if the cosigner is a close relative.
To put the cosigner in a better position, you could leave him or her money in your estate plan.
These funds would be set to be used for home expenses or to pay off the mortgage.
Why might this be better than setting up a joint bank account?
It limits financial entanglements between the two parties.
By the way, life insurance can be a perfect solve when you make your cosigner the beneficiary of the policy.
You probably do not want the relative to live in your home.
Adding a tenant and landlord dimension to your relationship could complicate matters in many ways.
All this noted, perhaps refinancing a loan would be far simpler.
Before making any of these decisions, working with an experienced estate planning attorney will help you best protect yourself and your cosigner.
However, before you even go down that path ...
What does the Bible say about cosigning on another's loan?
Interestingly, the Bible addresses this very subject.
Consider these three bits of wisdom in the Book of Proverbs alone.
Proverbs 17:18, “A man lacking in sense pledges and becomes guarantor in the presence of his neighbor..”
Proverbs 6:1-5, “My son, if you have become surety for your neighbor,
Have given a pledge for a stranger,
2 If you have been snared with the words of your mouth,
Have been caught with the words of your mouth,
3 Do this then, my son, and deliver yourself;
Since you have come into the hand of your neighbor,
Go, humble yourself, and importune your neighbor.
4 Give no sleep to your eyes,
Nor slumber to your eyelids;
5 Deliver yourself like a gazelle from the hunter’s hand
And like a bird from the hand of the fowler.”
Proverbs 11:15, “He who is guarantor for a stranger will surely suffer for it, but he who hates being a guarantor is secure.”
Bottom line: Cosigning for another's debt is not a prudent idea and should be avoided.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Los Angeles Times (July 30, 2017) “How cosigning a mortgage loan can bring big risks”