Weekly Rate & Market Update 3-18-16

Question of the week: Should I co-sign for my son/daughter’s mortgage?

Answer: Yes. No. Maybe.

Like most questions involving mortgages, real estate and finances in general, the answer is very situational.

It is not unusual for parents to want to help their children purchase their first home, especially in areas such as Southern California where the prices are high. However there are some factors to consider before offering the assistance.

First, you cannot co-sign bad credit. If your child has credit that precludes them from qualifying for a mortgage then adding you with your credit to their application does not change their credit, nor the lender’s recommendation. Often in these instances we look at the opportunity for the parents to purchase the home as investment property, renting the home to the kids at the rate of the mortgage, putting them on title and after they rehabilitate their credit seeing if it is possible to refinance mom and dad off the loan and title.

It is possible to co-sign for income. Some, not all, programs will use “blended ratios” for qualifying, meaning that the income to debt ratios for qualifying includes all the applicants’ income and all the applicants’ debt obligations. This is the most common type of parents co-signing for their children that we see. There are limitations regarding program types and loan amounts.

The upsides to co-signing on your child’s mortgage are obvious: they are able to purchase a home being the primary benefit, a secondary benefit is that you have leverage when it comes to spoiling any grandchildren….

There are downsides as well that need to be considered before obligating yourself to the mortgage debt. When working with a client who co-signed for a family member in the past we often hear, “that’s not mine, I just co-signed,” as if they have no obligation for the debt. Wrong. If you co-sign for any loan your as equally responsible for the repayment as everyone else on the loan. If payment is not made your credit is impacted, if the loan defaults the lender may come after you for satisfaction of the debt.

Before co-signing one of the factors I have you consider are how likely is it that your son or daughter will not be able to make payment in the future? Do they have spotty work history? Have you bailed them out not infrequently in the past, especially the near past? At times after taking an honest, and difficult, look at the situation I have seen parents decide to not co-sign until there is more financial stability in their child’s life.

Are you considering purchasing a home or financing a major purchase in the near future? For most practical purposes the full housing obligation for your child’s home, principal and interest on the loan, taxes, homeowners insurance, HOA dues if applicable, are counted against you for qualifying. There is a guideline for most mortgage programs that if you can show you did not make the payments for the prior twelve months and the mortgage payments are made on time the payment will not be counted against you. For example, you co-signed for your son and daughter in-law in 2012. You are looking to purchase a second home in Fallbrook that you intend to become your retirement home in 2020, but need a mortgage for the purchase. As part of our application package for your Fallbrook mortgage we collect proof that your son has made all the mortgage, and tax, payments on their home for the past twelve months. If you made even one payment, or paid the taxes, during this period then we count the entire housing obligation against you for qualifying; in this instance you would need to qualify using three housing payments: your own home, your son’s home and the home you are looking to buy in Fallbrook.

Should you co-sign for your son or daughter? Perhaps, but before you offer let’s have a discussion about the situation, your involvement and the impact on you for the short and long term.
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Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Plenty of news this week impacting mortgage rates, all of which became irrelevant due to Fed speak on Wednesday. Starting the cavalcade of data was the Producer Price Index for February, which showed flat to declining prices for the month and for the past twelve months. This data is positive for lower rates. Also providing good news for rates was a decline in retail sales in February, and a strong revision downward of January sales.

Contrary to the PPI data, the Consumer Price Index came in a bit hotter when food and energy prices are stripped from the model (“core prices”) showing a 1% increase in prices from January to February and 2.3% growth year over year. This is not friendly news for mortgage rates.

The markets moved little on the price news. Not the same story after the minutes and forecast from the Federal Reserve Open Market Committee were released on Wednesday. The Fed did not increase its discount rate, as anticipated, and announced it would increase the rate two times in 2016. The news sent stocks and bonds higher—lower rates. The Fed’s forecast through 2018 is for a slow growing economy, from 2.0-2.3% in 2016 and 2017 slowing to 2.1% in 2018. The news was pretty rate friendly as it suggests that while the Fed will be raising rates a bit this year but not a whole lot in 2017 or 2018.

Rates for Friday March 18, 2016: Rates retreated following increases for the past two weeks, and the momentum is down for the short term. It appears we tested the high for 2016 thus far and bounced off. My advice is still to lock through your escrow period when you can as to no lose the opportunity with the current rates.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.50% Down 0.125%
30 year high-balance conforming 3.75% Down 0.125%
30 year FHA 3.25% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs, recent rate change reduces credits

The Weekly Rate & Market Update will most likely be a bit short the next two weeks as we head out Orlando for a week of rides and roller coasters. Spring Break will be upon us which means one thing, as soon as we get back the kids will be counting the days until school is out for the year.

Have a great week,

Dennis