There are some financial principles, no matter how common sense they seem, that need repeating.
One of those is whether to co-sign. Unless it’s for your spouse, don’t do it.
And to prove my point, here’s another installment of my occasional feature about family financial feuds. The fussing this time is about a father’s decision to co-sign for his son.
The background:“I married the love of my life just over a year ago,” the reader wrote.
She’s 38 and her husband is 52. They’ve merged their assets. They are renting but want to buy a house they can fix up or expand to eventually accommodate her ailing father.
The dilemma: The couple is having trouble qualifying for a home loan because the husband co-signed a mortgage with his son several years ago. The son is married with three children. The new wife is incensed about the situation.
She writes: “Hubby has always financially supported his son 3 to one degree or other, even when he was making enough money to more than pay his bills and support his family. In my eyes, my stepson is a grown man with a job and a family and he should be taking care of things himself without taking money from his father. I am frustrated beyond belief that hubby is ‘trapped' in this other mortgage, which is impeding our own plans for a home of our own, to the point that I am considering divorce.”
The feud: The son has some poor debt management practices and as a result, refinancing to remove his father’s name from the mortgage would be costly. The son doesn’t want to refinance because he'll end up with a higher interest rate. He refuses to even discuss the refinancing option.
The wife asked: “Is there any legal or other recourse hubby and I have that would free him from this unfair mortgage obligation to his son?”
The bottom line: A lender asked for a co-signer for a reason. The son’s finances weren’t strong enough to qualify for a mortgage.
It’s understandable why lenders aren’t willing to easily release co-signers. It was based on the combined financial strength of both borrowers that the loan was made. Remove one — presumably the stronger one — and the lender is left with the person that couldn’t qualify in the first place.
Nonetheless, find out if the loan has a “co-signer release” option and, if so, what requirements need to be met.
Talk to lenders about your own qualifications for a mortgage. You might be able to qualify for a home loan, just not for as much as you want. Or, if the son has been making his mortgage payments on time and on his own, a lender may take that into consideration in approving your own loan.
Here’s another option. If the higher interest rate is the only thing standing in the way of the son refinancing, find out how many points he would have to pay upfront to get a lower rate. Then perhaps you could offer to give him the cash to buy down to a lower interest rate. Be sure to check that the gift is allowed.
But can I address what I think is a deeper issue here? The wife is indignant about the son’s refusal to refinance, and she’s wrong. Her anger is misplaced.
The son is not being unfair to his father. In fact, he’s being financially responsible. In this case, refinancing won’t be in his best interest because it will increase his housing expense. He’s got a family and some money management issues so he’s right to object to refinancing if it increases his financial burden.
The time to push the son to “man up” would have been before co-signing. He probably wasn’t ready for a home. But his father’s co-signing enabled him to live above his means.
When you co-sign you are on the hook for the entire loan too. It often can impact your ability to borrow in the future. It can negatively impact your credit history if the primary borrower doesn’t pay or pays late all the time. When you co-sign you trap yourself.
I would tell the wife to take her focus and frustrations off the son. It was the responsibility of her hubby to fully understand what co-signing could mean to his future financial plans and needs.
And it was the wife’s responsibility – before she got married to the love of her life – to gather and share all financial information and