SHOULD I COSIGN A LOAN?
Cosigning a note always involves the inherent risk of being a co-borrower. A cosigner takes the risk that the other party will not pay the note. Cosigning also affects your credit (credit reports do not distinguish between signing and cosigning). Cosigning for someone else may have significant other effects such as gift tax implications and/or disqualification for public benefits for the person cosigning, especially if title transfer is involved. The most common situation is parent cosigns a loan for child to buy a house. The bank usually wants parent’s name on title also. This may not be good for either parent or child. Besides the liability reasons as stated in a prior article “Should I Quitclaim my house for a Refinance,” if parent does have some wealth, when parent later transfers his interest back to the child, it may have gift tax or estate tax implications to the parent. However, the more likely situation is parent doesn’t have much money and parent’s health deteriorates after the loan. Parent now needs to obtain homecare or to move to a skilled nursing facility that parent can’t afford and needs to apply for Title XIX (Medicaid) benefits. If the child’s property is still one-half in parent’s name or was transferred back to the child within five years of applying for these benefits, the one-half interest in the property is treated as parent’s and parent will not qualify for the benefits parent needs. Now the child has to either sell and give parent half the proceeds, which parent will have to use to pay for his/her care, or refinance without parent and buy parent out of parent’s interest, again giving parent half the equity in the property for parent to pay for their care. Parent and child knew parent did not invest in the house when purchased and the loan cosigned, nor did parent make any payments on the loan; parent’s signature was just an accommodation to the bank to get the loan, but now the child has to pay parent, putting child farther into debt.
As stated in my prior article “Should I Quitclaim my house for a Refinance” a parent can still cosign a loan without being on title, thus avoiding most of these pitfalls. However, parent cosigning a loan for child will affect parent’s credit should parent need to refinance or finance something in the future possibly jeopardizing parent’s ability to do so.
Again, signing your name is simple, but are you aware all of the implications of that signature? That is where the true value of an Attorney’s advice falls.