Sometimes it can even create havoc with the benevolent person’s credit score for years. And it can lead to some difficult moral and ethical dilemmas.
What does money expert Clark Howard recommend in these types of situations?
I Co-Signed a Mortgage With My Daughter and She Missed Payments. What Do I Do Now?
I co-signed my daughter’s mortgage. But she missed payments without telling me and messed up my credit. What should I do?
That’s what a Clark listener recently asked.
Asked Lydia in Georgia: "I co-signed on a home loan for my daughter. I know, this is NOT something you ever recommend, but here I am.
"I found out my daughter was late on some of her payments! This brought my credit score down from around 800 to 630. Is there a way to sign my portion of the home loan over to her to get my name off the loan?
"She's been going through a lot over the past several years and was not able to make her payments. She recently had her car repossessed so she said is not able to refinance right now. She suggested I refinance the house to take her off, thinking that would help repair my credit. She has a lot of equity in the house because we bought it really cheap. Help!"
Lydia is in a pickle. Her near-perfect credit is now right at the edge of subprime.
“Lydia, out of love for your daughter, you co-signed. And as you know and as you’ve heard me explain over the years, co-signing is all the disadvantages of a loan with none of the advantages,” Clark says.
“You don’t want to refi this. Almost certainly, when you took this out, it’s at a great rate. You don’t want to take the home over by refinancing into a new loan. With the credit score you have, you’re going to be in a loan that’s going to carry a very high interest rate. And you’ve got all the closing costs.”
Start Monitoring the Monthly Payments and Making Sure No More Get Missed
What is the right solution for Lydia?
“The best thing for you to do is to be added to the notification of monthly loan payments. Where you can monitor the account. Or have access to signing into the account with the mortgage company,” Clark says.
“So you can make sure that each monthly payment is made on time. Ignorance of whether your daughter’s paying or not is not bliss.”
It’s Lydia’s responsibility to make sure every payment is made on time. If her daughter hasn’t done so by a certain date in the month, and it’s getting close to past due, Lydia needs to make the payment herself.
“You can’t take yourself off the loan. The lender’s not going to do that,” Clark says. “So the best thing for you to do is stay in the game and monitor that game every single month. And if she can’t make the payment, you’ve gotta make the payment.
“And you will rebuild your credit as the late pays go into the background. You’re responsible for them anyway. So if she can’t make it on time, you make the payment.”
Addressing the Home’s Equity
Lydia can make a side agreement with her daughter to get some additional equity in the home in exchange for making the payments for a time.
“This is a mess. I mean, she’s having a really hard time, obviously. My heart goes out to her and to you. Having the car repossessed, the problems have continued. So your responsibility at this point needs to be to make sure that the payment is being made every month,” Clark says.
“You can do a side agreement with her that gets you, if you want it, additional equity.
“You said the house has enormous equity now. And so if there’s a way until she stabilizes that you make sure the payments are made every month … since you’ve got to make them regardless as a co-signer, that’s the best thing rather than some kind of hocus pocus signing it over to you.”
Selling the Home: Another Option
Lydia mentioned her daughter holds significant equity in her home despite all the problems. That begs the question: should they sell?
“I’m reading between the lines here. It reads like Lydia wants her daughter to have the stability of the house,” Clark says. I’m making a supposition that the house can be part of her building blocks of getting new stability in her life.
“If things really don’t stabilize for your daughter, then yes. It would make sense to sell the house. You’ve created a lot of equity with what has happened with the market since you owned it. And it takes away the permanence of your daughter being able to live there.
“But if her life’s just not easily getting together, selling the house would be an option.”
Final Thoughts
A co-signed mortgage with a family member who may not be financially responsible can create a multi-pronged nightmare.
If you’re in that situation, the most important thing you can do is ensure you have access to the mortgage lender. That way you can monitor that payments get made going forward — or you can make the payments yourself.
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