Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].

Question from Calvin in FL: Hello Brian, I’m 27 and have wanted to buy my first home ever since I finished college. But I’m heavily saddled with student loans to the tune of $425 per month. I also have a $195 a month car payment and my rent is $1,445. I don’t have any credit card bills. I count myself among the lucky people because I started a job as a project manager this summer. My salary is $61,000, I’m expecting a promotion soon, and want to make this my career. My monthly take-home pay is about $3,800 but I’m also contributing about $115 a month to my 401k. I’ve been deferring my student loan payments and I’m hoping for loan forgiveness some time down the road. But I’ve been saving the student loan money and diligently saving everywhere that I can to come up with a down payment for a home.

Last month, I started seriously looking for a home. Here’s my problem, all the houses that I’ve wanted to make an offer on have been above $220,000. The loan broker says that based on my income, I need to scale that back to between $175,000 and $185,000. However, he says that if I have a cosigner, he can find me a lender willing to go to $235,000 or maybe more. I’ve talked to my dad about cosigning for me, but he says no, end of discussion. Can you help me understand why he is so adamant about not cosigning? The difference between what I qualify for, and the purchase price will only be about $40,000.

Answer: Hello Calvin. The short answer to your question is that the risk to your father is much higher than the $40,000 that you think it is. Unless your father is relatively wealthy, I must agree with his flat answer of no. Still, I get it. You’re hardworking and responsible. However, what your father appears to understand is that as a co-signer, he and you (the primary borrower) are equally responsible for repaying the full amount of the loan. If you were to fail to meet your obligation, it would become your father’s responsibility to pick up all the slack. In most circumstances, he not only has to make your full mortgage payment but would also owe penalties, late fees, additional interest, etc.

It goes beyond being responsible for all your mortgage because your home loan becomes part of his overall debt. It’s all one big ball of string. If you fail, it can directly affect his credit rating. Conversely, if you manage your mortgage responsibly, your father might see a slight improvement in his credit score.

Your father might not be thinking only about finances either. He might also be thinking about the next 30 Thanksgiving dinners. It's potentially risky to your father-son relationship if the loan goes bad. How would you feel if you jeopardized your father’s retirement in a few years?

Being a cosigner on a home loan, or any loan is all risk with no rights at all. Without including him on the title, your father would never be able to own the home, refinance it, or use it to guarantee a loan for himself. The loan on your home would count against his debt-to-income ratio, he may even have trouble qualifying for a personal loan for which he otherwise would qualify. It’s all downside with no upside other than the status of being a generous dad. Calvin, have you even asked him if he’s financially comfortable covering the mortgage payments if you can't?

Before you pressure your father to cosign your mortgage, give him a few other alternatives that he might be more comfortable with.

1. Help with closing costs. The more of your money that goes to the down payment, the less mortgage you need to qualify for. Your father might be able to help with other aspects of the loan. Perhaps paying the closing costs or buying down the interest rate on the loan. The goal with any of these is lowering your monthly payment so your debt-to-income ratio falls within the lender’s guidelines. Generally, lenders prefer a debt-to-income ratio lower than 36%, with no more than 28% of that debt going towards servicing a mortgage payment.
2. Your father could gift part of the down payment to you. But there are rules, limits, and best practices that lenders want to see when using a gift for a down payment. You will want to work with your loan officer to ensure you are going about things the right way.
3. Your father could buy the home himself. He could then rent it back to you until your get that promotion and can qualify for the full mortgage. This way, your father is on the title with more control over the property (refinancing for example). Or he could turn around and sell it to you without the stricter qualifications required by institutional lenders.
4. Another alternative is as a co-owner or co-borrower with you. This way, both of your names are on the title. Your father would still be fully responsible for the entire mortgage if you failed to make the payments. Technically, cosigning and co-borrowing are different. A cosigner guarantees the debt and only takes responsibility or an equity stake if and when the primary borrower defaults. Co-borrowing gives everyone signed on the contract ownership equity right away.

Calvin, I suggest that instead of cosigning, you talk over these alternatives with your father. You can remind him that owning a home remains one of the best investments a person can make. And the sooner a person can purchase a home, the better the investment often becomes.

I’m always open to other ideas. Please comment with your thoughts or other alternatives.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].

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Brian Kline

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News

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