Co-signing a loan for a relative or friend is always something that you should think about carefully — after all, you could be stuck with the payments if that relative or friend fails to pay. However, even if you entirely trust this person to make the payments, you need to beware of another possibility: He or she could die.
That could bring a whole new set of problems.
Consider this example: You co-sign a home loan for your favorite niece because she’s having trouble getting a bank to approve her for a conventional loan since she’s self-employed or has only been in her current job for less than a year. You know she’s responsible and have no doubt that she’ll make the payments — which she does.
Then, something awful happens and she dies — leaving you solely liable for the payments on a house that you may not have any legal right to if it isn’t also in your name. That’s a risk that many people don’t consider when they agree to co-sign a loan. Here are some possible ways you and the person you’re helping can mitigate your risk:
1. You can ask for a transfer-on-death (TOD) deed. That would give you immediate ownership of the house if the person you are helping dies, without putting the house through probate. Your ownership would be complete immediately upon that person’s death, so you would at least have the house to sell and the equity to claim if you wanted. However, keep in mind that Nebraska has inheritance taxes that have to be considered, so discuss this option carefully with a probate attorney and financial adviser first.
2. You could draft an agreement that requires the individual you are helping to take out mortgage insurance that will pay off the debt in the event of his or her death. This is typically offered at the time of purchase by the finance company. While it adds a little to the monthly payment, the security of knowing you’d be free of the debt is entirely worth it.
For other possible options that you and your friend or relative can consider, talk to a probate and estate attorney today.
Source: Los Angeles Times, “How cosigning a mortgage loan can bring big risks,” Liz Weston, July 30, 2017