My friend wants to put my name down for a house he's buying. What risks would I be taking?

Question

My good friend, who I have known since we were kids, asked me for a favor today. He originally intended to get a house with his now ex-girlfriend so that he could invest in one and later on, sell it.

The favor is the following: he wants to put my name down in buying the house with him since he cannot "afford" to do it alone. By this, he means the bank is willing to loan him 3x–4x the amount of his salary—but that's not enough. So, they would take my salary into account in order to arrive at the amount he needs to get the house. HE does not need any money from me, and he says he can remove my name after one month through something called Transitional Arrangement. (He compared it to a couple breaking up and the house being transferred entirely to one person in an agreement).

What he needs from me is for me to sign something, and 3 months' bank statements and 3 months' pay slips.

What are the risks, if any, could I be facing?

Answer 1

That "something" you are signing means you are liable for the mortgage payments - yes, all of them - if he can't or won't pay at any point.

The limit on what the bank will lend him based on his salary is there for a reason - they don't expect him to be able to keep up repayments if they lend him more (or more precisely, there's a big risk that he won't). Don't forget that even if he swears up and down to you that he can afford them, interest rates can rise; this is a 25 or 30 year commitment you would be making. Interest rates are at a historic low and the only way from here is up; in my living memory rates have been 12% or even 15%. As a very rough rule of thumb, for every £100k borrowed, every additional 1% on the interest rates costs an additional £100 on your monthly payment.

Also, the "Transitional Arrangement" is not without its own fees and the bank won't let him simply take you off the mortgage unless they are convinced he can keep up the repayments on his own, which they clearly aren't.

Also thanks to Kat for the additional good point that being on the hook for your friend's mortgage will prevent you from being able to get a mortgage yourself while the liability still exists, or at least severely limit your options. No matter how many times you protest "but I'm not paying any money for that!" - it won't help.

Another point: there are various schemes available to help first time buyers. By signing up for this, you would exclude yourself from any of those schemes in the future.

Answer 2

What are the risks, if any

The risks are exemplified by the outcomes presented on this website, including:

• What can I do when the co-signer hasn't paid anything on the house in 7 years and now they want money?
• How do I get myself out this disastrous situation
• What can I do as a co-signer?
• I signed on as the co-signer on a car loan and somehow ended up being the primary name on the account
• Estate liability for co-signer to Sallie Mae student loan?
• Co- Signed car loan and need to have the other signer relinquish claim to ownership
• If the co-signer on my car loan dies, can the family take the car from me like they're threatening to?
• etc ad nauseam

There's a chance you will end up paying large mortgage payments on a house occupied by an ex-friend and paying large amounts of money to lawyers to try and get things straightened out. You could come out of it a lot poorer and with your credit rating wrecked.

Answer 3

Wrong way round. Transitional arrangements are non-binding guidelines that the lenders can observe if they choose to. The borrower - like your friend - doesn't get to choose whether to use them or not.

Your friend obviously can't afford the property, so if you do this, all I can say is congratulations on buying your new house, and I hope you got a deal on the mortgage.

Answer 4

You should only loan money to friends or relatives if you are fully accepting the possibility of never ever getting that money back.

And in this situation it can happen that you will be forced to give him a very large loan if something bad ever happens to him. (Paying the monthly rates instead of him and expecting he will someday pay it back to you is technically the same as loaning him money).

Something might happen in the future which will result in him not paying his monthly payments. Maybe not now, but in 5 years. Or 10. The economy might change, he might be out of a job, his personal values might change. A house mortgage is long term, and during that time a lot can happen.

Answer 5

Something else to consider, even if your friend is on the up and up and never misses a payment: Until the house is paid off, any time you apply for credit banks will count the mortgage payment on your friends house against your ability to pay all your existing debts in addition to whatever new loan you're applying for. If you're renting a home now, this will likely mean that you'll be unable to buy one until your friends house is paid off.

Answer 6

Short answer: don't do it. Unless you know something that the bank doesn't, it's safe to assume that banks are a lot better at assessing risk than you are. If they think he can't afford it, odds are he can't afford it regardless of what he might say to the contrary. In this case, the best answer may be "sorry for your luck;" you could recommend that he comes up with a larger down payment to reduce his monthly payment (or that he find a way to get some extra income) rather than getting you to cosign.

Please also see this article by Dave Ramsey on why you should never cosign loans.

Answer 7

Both of you sit down with a lawyer who practices in real estate and foreclosures, and hash out every single possibility of what could conceivably go wrong, with nothing out of bounds. Come up with a reasonable and fair plan for resolving each situation, that you are willing to commit to, life and breath, for real, no exit. Put all of it into a legal commitment between you two.

However this is a fearless, searching and even ruthless contemplation, requiring a level of intimacy and personal responsibility you may not be comfortable with. and there's absolutely no room for dancing around unspoken questions. So in essence, it puts the hardest stuff up-front. If you put that much thought and honesty into it, you'll probably be OK.

But you probably won't want to be that honest, or won't want to do the deal after you do.

Answer 8

This is not a full answer and I have no personal finance experience. But I have a personal story as I did this. As Vicky stated

Another point: there are various schemes available to help first time buyers. By signing up for this, you would exclude yourself from any of those schemes in the future.

I did this for my dad when I was 16 or so. I am in Canada and lost $5,000 first time buyers tax rebate. As long as many other bonuses like using your rsps for your first home.

I also am having a fair amount of trouble getting a credit card, because even though I am only a part member of the mortgage they expect you to be able to cover the whole thing. So when the banks look at my income of say $3000 a month they say "3000 - rent(500) - mortgage(3000)" You make $-500 a month. I then explain that I do not actually pay the mortage so it is not coming out of my paycheck. They do not care. I am responsible for full payments and they consider it used.

Answer 9

The risk is that you will owe the bank the principal amount of the mortgage.

Based on your question it would be foolish for you to sign. Anyone who describes a mortgage as "something" obviously has no idea what they are doing and should never sign a mortgage which is a promise to pay hundreds of thousands of dollars.

You would be doubly foolish to sign the mortgage because if you are guaranteeing the loan, you own nothing. So, for example, if your friend sold the house, pocketed the money, then left the country you would owe the full amount of the mortgage. Since you are not on the deed there is no way you can prevent this from happening. He does not need your approval to sell the house.

So, essentially what your "friend" is doing is asking you to assume all the risk of the mortgage with none of the benefits, since he gets the house, not you. If a "girlfriend" is involved, that just increases the risk you will have a problem. Also, although it is not clear, it appears this is a second house for him. If so, that disqualifies him from any mortgage assistance or relief, so the risk is even higher.

Basically, it would foolish in the extreme to co-sign the loan.

Answer 10

If you really want to help your friend buy a house, make a counter-offer to buy the house yourself and lease it to your friend, with the option to buy for original purchase cost, plus all interest paid so far to the bank, plus closing costs and other expenses incurred by you, minus payments made so far by the friend. Otherwise, just no. The other answers already detail why.