If you've made a few dollars here and there you may be in a position to help someone buy real estate by co-signing a loan. But while such assistance can be the key to buying for someone with limited cash or credit, co-signing a loan should be done with care.

Co-signing means extending your credit for the benefit of someone else, perhaps an adult child, relative, or a friend. If the borrower defaults, the lender will then look to you for repayment --not partial repayment, but full and complete settlement of the debt. In effect, you're not just a co-signer, you're also a co-borrower.

Can you reduce the liability which co-signing represents? Not totally, but there are some steps which may be helpful.

Co-signing a loan is a business matter so do what business people do: Get a credit report from your co-borrower. Any offer to co-sign should require a credit report satisfactory to you.

• Have a written agreement with the main borrower. Do it right, have an attorney write up the paperwork.

• Define your contribution. Are you extending credit, cash at closing, or both? Will you have any cash obligations after closing?

• How much cash is your co-borrower putting into the property? The greater the downpayment, the lower your risk.

• Will you be on the title? Most lenders require co-signers to also appear on the title as a co-owner. If you're on the title, and if you make cash contributions, are you entitled to any deductions for mortgage insurance or property taxes? See a tax pro for details.

• If the loan balance is reduced to a certain amount, will you automatically be released from the loan by the lender?

• How will your credit be impacted? If you co-sign a loan it must be disclosed when you apply for financing to purchase a home or make other credit requests. Will lenders see co-signing as a deficit? Not always. Some lenders will not count a co-signed debt against you if you can show that you have made no cash payments to assist your co-signer for the past year. In practical terms, this means it helps to have copies of monthly mortgage checks from your co-signer as they are paid out. This can be a written condition of your acting as a co-signer.

• If the property is sold, are you entitled to any of the profit? What if there's a loss?

Co-signing can be a generous gesture which greatly helps those with limited or impaired credit. At the same time, co-signing in a way that damages your credit, costs you money, or makes you uncomfortable is a financing option to avoid.

Published: December 18, 2000

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