Question: My parents have been trying to refinance their home but are unable to because my father cannot work due to a car accident. We were told that if I co-sign a loan for them I can then do a quitclaim deed after the refinancing and I will have no obligation to the loan or property. Where my confusion lies is in most of the reading that I have been doing it talks about ownership, I am more concerned about not being responsible for the mortgage as I am looking to buy my own house within the next few years.
A.L., Everett
Answer: You are correct to be concerned about the effect that this would have on your ability to buy a home in the future.
There is a lot of confusion about how a quitclaim deed works with a mortgage, which is why it is a frequent topic in this column.
Whoever told you that you can use a quitclaim deed after closing on a refinance loan and have no obligation on the loan or the property is only half right. You can use a quitclaim deed to give up your ownership interest in a property any time that you want, but that has absolutely no impact on the mortgage attached to the property. The deed to the property and the deed of trust that secures the mortgage on the property are two separate instruments.
If you apply for a mortgage with your parents, you would be a full co-borrower on the mortgage. As a co-borrower you would be responsible for 100 percent of the payments on that mortgage, along with your parents. If your parents failed to make the mortgage payments, the lender would come after you for the payments and your credit would be seriously damaged.
Even if your parents make all of their mortgage payments on time, that loan could still create problems for you when you buy a home of your own — at least temporarily. That’s because your parents’ mortgage will show up as a debt on your credit report because you are a co-borrower on the loan. If you want to buy a house, you will have to have enough income to qualify for both the mortgage on your parents’ home and the new loan for the home you want to purchase. For many people, that’s not financially possible.
However, if your parents make the mortgage payments on time for at least 12 months, and you can produce copies of their bank statements and canceled checks to prove that they are making the full loan payment each month and you are not making any part of those payment, most mortgage lenders will not count that debt against you when you apply for a mortgage to buy a home.
But please keep in mind that you would still be on your parents’ mortgage and fully responsible for the payments on the loan, even though those payments may not be included in calculating your debt-to-income ratio for the purposes of qualifying for a new mortgage to buy a home.
Getting back to your quitclaim deed question, if you agree to be a co-borrower on your parents’ new mortgage, you have to be on the title to the property at closing. If you choose to use a quitclaim deed to take your name off the title to the property, you would still be fully responsible for mortgage on the property. So you would put yourself in a very bad position: You would have no ownership interest in the house, but you would be responsible for any late or unpaid mortgage payments on the loan tied to that property. That’s a very risky financial position.
I understand that you love your parents and you are trying to help them out, so you may be willing to assume that risk. But if you are on the mortgage, I think you should remain on the title to the property until the mortgage is paid off. That way, if worst comes to worst, you will have an ownership interest in the house if you are forced to take over the mortgage payments at some point in the future.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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