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Parents co-sign student's mortgage

Dr. Don TaylorDear Dr. Don,
I am a student and I would like to buy a house. I could put $5,000 as a down payment. The question is, can I get a mortgage if my parents are co-signers when I apply?
Ricardo Return

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Dear Ricardo,
There are lots of good reasons to own a home while you are a student. Building equity in a home vs. paying rent for an apartment or dorm room can be a financial savvy thing to do.

You can build a credit history that will make it easier to borrow in the future, you will earn any appreciation on the property and you may be able to use the interest rate deduction on your taxes.

There are also lots of good reasons why your parents might be willing to co-sign the loan to help you get a mortgage. They'll be helping you build a credit history, and help you qualify for a loan that you wouldn't be able to get on your own. That said, you should think long and hard about whether or not you should take this step.

When your parents agree to co-sign the loan, they are representing to the lender that they will step up and make the payments if you do not. The loan's payment history becomes part of their credit history and will show up on their credit reports.

If you declare bankruptcy or the house is sold in foreclosure, your parents will be on the hook to make the lender whole on the loan. The Federal Trade Commission (FTC) has an electronic brochure on co-signing that you should review with your parents to make sure that they fully understand the risks.

If you're not able to use the mortgage interest deduction but your parents would be able to, it may make more sense for your parents to own the home and take out the mortgage in their names, and you to rent from them. It won't do anything for your credit rating, but it may reduce the cost of housing while you're in school.

Decide what your true goal is in owning a home while you are in school. If it's building a credit history and investing in real estate, then you don't want to rent from Mom & Dad. If it's low cost independent living, you should talk them into being real estate investors rather than just co-signors on your note. If you plan on owning the house together, then get professional tax advice on how to structure the deal.

Finally, take a look at first-time home buyer programs offered by your state or local housing authorities to see if you qualify for one of those programs without your parents co-signing your mortgage. The National Council of State Housing Agencies (NCSHA) site can direct you to your local housing agency where you can learn more about first-time home buyer programs available in your area.


-- Posted: Dec. 17, 2001




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