Co-signing a daughter's mortgage endangers retirement plans
When loan goes upside down, parents' golden year dreams go topsy-turvy
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Dear New Frugal You,
When my daughter bought her home in 2006 it was the height of the mortgage boom! Now her house is worth less than her mortgage. To make matters worse, my husband co-signed for her. Well, I am retired and he will be in February. She was going to refinance before he retired. We wanted to buy another home in North Carolina, but are worried that our credit it extremely tied up with him on her mortgage. Our home is almost paid for and she pays her bills on time each month. If she was behind and in danger of losing the home, there would programs available but since she pays her debts, there is nothing. At least nothing that we can find. Are there ANY programs or mortgage lenders there who can help?? -- Patricia
Patricia, you're right. The decline in the housing market has endangered both your daughter's finances and your retirement plans. Not that it's any comfort, but your daughter has lots of company. According to CoreLogic Inc., approximately one in four homeowners with a mortgage owe more than their home is worth.
You're actually looking at two separate problems: your daughter's upside-down mortgage and your planned retirement home. Let's look at them individually.
Like you, many people thought that it was unfair for homeowners to need to fall behind in their mortgage to qualify for help. Recently that's been addressed as part of the Making Home Affordable program.
It's for people like your daughter who are current, but upside down in their mortgage. There are a number of requirements to qualify for help, including that she must live in the mortgaged property and her FICO score must be above 500.
The biggest hurdle is that the existing mortgage holder must be willing to write off at least 10 percent of the unpaid mortgage balance. Depending on the profitability and policies of the lender, that may or may not be something that it will do.
If she qualifies and the existing lender agrees, your daughter would get a new FHA mortgage for the current value of her home. She can check eligibility online at MakingHomeAffordable.gov or by calling HUD at (888) 995-4673.
Getting your retirement home may not require your daughter to refinance. If she can't refinance, she can approach the mortgage holder about removing your husband from the loan. Given that she's made the payments for the past four years, it's possible (although unlikely) that they'll agree. It's one of those "it can't hurt to ask" situations.
What if your daughter can't refinance or get your husband off the existing mortgage? Are you doomed to an unhappy retirement? Not necessarily. There are still ways to get that retirement home.
If you're looking to move permanently it is a little easier. There are two strategies that could get you in without a new mortgage.
The first is a bridge loan. That would allow you to buy the new home and use the proceeds from the old home to pay the bridge loan without taking a mortgage. The lender will probably want to use your current home as collateral for the loan.
Another possible alternative would be to sell your existing home first. Then you'd be able to take the proceeds and negotiate a cash deal on the new home. You'll probably even get a better price since the seller wouldn't have to worry about mortgage approval.
If your retirement home will be second residence, you might want to think smaller. Condominiums have been particularly hard hit and are relatively inexpensive. A small mortgage against your current home should cover the condo purchase.
If you do need a mortgage to buy your new home, don't try to hide the fact that you co-signed on your daughter's mortgage. Failure to disclose it could be enough reason for the lender to call in your mortgage note if they find out later.
Is there a moral to the story? Only that when you hear the word co-signer you probably should not borrow the money or help someone with your signature. Hope that you enjoy your retirement years and new home!
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