English: Seal of the Federal Home Loan Bank Board. (Photo credit: Wikipedia)Financial IQ Philippines Quick Hit(s):If you are considering assisting your friends or relatives in availing loans, with you as the co-signor or guarantor... think twice first and understand the repercussions. That is, you will be the one responsible for the loan in case the primary person bails out.
Co-signing a home loan is like strapping yourself to an amateur bungee jumper, and then insisting the rope’s too short. Unless it’s your wife or sibling, I don’t even want to know the reason; it’s liable to make LSD look like a glass of warm milk. But before you willingly dive into 10 to 15 years of debt, take some time to consider the dangers. Co-signing a home loan brings severe disadvantages, and you’ll want to be prepared:
1. It Can Stop You Getting Your Own House
When you co-sign a home loan, it’s as good as getting the loan yourself.
The bank doesn’t care that someone else is paying, or what your deal with them is. When you approach the banker for a home loan, he’ll check the records, see you’ve already got one, and turn you down. End of story. The only time you’re getting a new home loan is when the old one gets paid off; which, depending on the borrower, might take 10 to 15 years.
If you’re co-signing for a spouse, this might not be a problem. But if you’re co-signing for a sibling or child, consider the ramifications: if for some reason you can’t stay in the same house, you’re still saddled with the home loan. Do you know how ridiculous it is to rent a house while you’ve got a home loan? It’s like asking for matches because your hair is on fire.
And if you can’t afford to rent…well, there are plenty of ways to become homeless, but you may have just found the stupidest.
2. It Can Sink You in Debt
What happens when the co-signatory can’t make repayments? Well, the banker scrapes its claws across the loan document, and notices there’s another name there: yours.
Don’t think you just have to pay the balance. Your co-signatory would have accumulated late fees, attorney fees, and compound interest. And by the time your co-signatory is officially declared bankrupt, you may be looking at years of missed payments. At which point, your only help will come from Googling “bank robbery” or “organ harvesting”.
Oh, and if you can’t make those payments? The bank has a right to garnish your wages, foreclose on any other property you might have, and just outright declare you bankrupt. Hard to deny that accusation from the bridge you’re living under.
3. It Damages Relationships
“Gee, I’m sorry I bankrupted you and left your whole family on the streets, but happy New Year!”
That might be the awkward statement on your co-signatory’s mind, at every family reunion from now on. That, or the location of the nearest hospital, depending on whether you’ve gotten over things. But consider point 2, and think what would happen if you’re dealing with a son, sibling, or spouse.
Yeah, uglier than botched Botox.
It’s inadvisable to even lend to friends or family, let alone use their home as collateral. If you really need to help them out, consider a one-off donation instead of co-signing. Co-signed home loans can permanently rip a family apart, especially when your children start paying for it.
4. It’s Difficult to Extricate Yourself
Once your name is on the home loan, extricating yourself is like unwinding barbed wire with your tongue.
Maybe your co-signatory has just lost his job, or has a divine message to bet his life savings on the next race. Well good luck; you probably won’t get your name off that loan document on time. Few co-signatories get away before the loan tenure is up; even if your co-signatory has no problems with the change (and you’ll need his approval), the legal fees are steep.
The first time you co-sign, the bank absorbs the legal fees. Every subsequent change, you pay the fees yourself and waste a lot of time.
5. It Might Damage Your Credit Score
If your co-signatory is meant to pay the loan, you’d better hope he does it regularly.
Late or missed payments will show up in your credit reports, because it’s your loan too remember? Suddenly, anyone running your credit check starts thinking “Whoah, this person has the fiscal responsibility of a five year old in candy store”.
This can cause serious problems, especially when making a major purchase (like a car). Your net worth is similarly affected, because that loan you co-signed now adds to your liabilities. This might translate to higher interest for other loans, and even affect insurance premiums. And, of course, the home loan ultimately adds to your credit ceiling; there’s only so much money each of us is qualified to borrow, and a home loan takes up the lion’s share of that.
So if you’re going to co-sign a home loan, think beyond immediate relationships. Yes, it might hurt your relationship if you turn them down; but how much worse will it be if they default?
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