Identifying the Pros & Cons of Co-Signing a Home Loan
Co-signing happens when somebody promises to back up a loan for somebody else. Somebody may ask you if you’ll co-sign a loan for them. They’re asking you to become legally liable to pay off a debt if they are unable to pay it off themselves. This page discusses co-signing from a co-signer’s perspective.
A home loan is a monumental financial commitment in the life of a Singaporean that becomes the core tenet of their budget plans in the long run. Unfortunately, the property rates in Singapore are so costly that you need to be born with a golden spoon instead of a silver one to purchase a home without getting a long-term home loan. Shouldering the burden of home loan debt can often prove to be too exasperating to bear, especially when you are living in the world’s most expensive city.
Keeping this under consideration, numerous financial institutions have rolled out the option of co-signing a home loan by a third party to act a guarantor for its payment. It means that the guarantor essentially signs up to become legally liable for any future defaults in payments made by the primary debtor.
Although it may be one of the most generous financial gestures one can make in assisting a debtor accomplish their home ownership goal, co-signing a home loan has serious implications that must not be taken lightly whatsoever.
Who are Co-Signed Home Loans Suited For?
Co-signed home loans are most popular among borrowers that demonstrate the following financial characteristics:
- Weak credit history
- High debt-to-income ratio
- Inconsistent job history
Financial stability is a dream easier dreamt than actually realized; therefore, co-signed home loans offer great financial crutches for someone riding the financial recovery road. For instance, a primary borrower who filed bankruptcy due to unforeseen business setbacks can enlist the help of a friend or family member to guarantee the loan contract.
Typically, co-signing home loan contracts is a financial undertaking that only close family and friends are comfortable delving into. For instance, parents can volunteer to co-sign a home loan for their child if he does not have adequate credit history to get a home loan at the start of his career. Even though the co-signer may feel compelled due to social obligations, it is imperative to adopt an impersonal perspective and assess their credit history thoroughly before taking such a drastic step.
Secondly, different loan contracts come with diverse terms and conditions that must be heavily scrutinized before you sign on the dotted line. You can approach some home loan specialists who can decode all the legal jargon involved for your convenience.
What to Consider Before Co-Signing?
Here are the 3 most essential factors to consider before co-signing a home loan for a beneficiary:
1. Debt-to-service ratio (DSR)
Although the co-signee is not obligated to make any loan repayments unless the primary borrower defaults, it will still be classified as a liability on your financial portfolio when you apply for a loan. As a result of this, your DSR will automatically shoot up and you will face more hurdles and less attractive interest rates when you try to seek out a loan for yourself.
2. Financial Liabilities
The worst case scenario would obviously be the primary borrower becoming financially insolvent or running away from the country. This means it will be you in the line of fire when the bank’s target shifts to the co-signee for fulfilling their role as a guarantor.
However, it is important to know that simply being assigned a guarantor role will not lead to any damage of your credit score in case the main borrower defaults on his payment.
3. Contract Rigidity
Getting out a co-signed home loan is a Herculean task that is impossible to accomplish without the collective consent of the main borrower and the bank. In the majority of cases, the borrowers are compelled to refinance the loan, or produce a significant improvement in credit quality.
A desperate or hostile borrower may seal your exit path out of the loan contract if they think even one of these options is financially viable.
Bankers like to follow the path of least resistance when it comes to recovering their money; hence, they will approach you even if the primary borrower defaults on one monthly payment if they feel you have the resources to cover that uncleared debt. However, this usually happens only when the borrower has committed a series of defaults on loan payments.
As you can see, co-signing is an incredibly convoluted way of getting a home loan due to the involvement of multiple parties in the equation. Before jumping into it, you must consult with an attorney and assess the financial variables involved so that you get a clear picture of the responsibilities and potential hurdles you might face in the future.
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