Say 'no' to cosigning a mortgage

Today's volatile market means that lenders are even more weary than they may have been a few years ago. Consequently, many mortgage applicants, even those with good credit, find themselves needing a cosigner.

A cosigner essentially guarantees the loan in the event the primary borrower defaults on the loan. This means that the bank can legally require the cosigner to pony up the cash should the primary borrower miss their payments. However, this is something many borrowers and cosigners never think actually happens until they default and the loan ends up (negatively) on the cosigner's credit report. This is when friends become enemies and blood begins to boil between family members.

To avoid this, check out the following alternatives to cosigning on a mortgage. You'll avoid financial headache while saving important relationships in your life.

1. Gift cash instead. Cash is king. Offer to give a cash gift instead of putting your credit on the line. They get to increase their down payment and you save your credit in the event they default on the obligation. Have them check with the lender about any rules for gifting cash in a real estate transaction. This may help sweeten the deal if they put down more money, because they may not need a cosigner due to the higher down payment.

2. Ask them to wait. Waiting and allowing some time for them to correct any deficiencies in their credit history might be another option that keeps your credit from potential harm. If you really want to be helpful, discuss the credit issues openly and offer to help where possible. Helping them understand where they went wrong and offering potential remedies is more helpful to them in the long term instead of putting your credit on the line.

3. Just say "no." In the end, this may be the best option. Cosigning a mortgage is a financial commitment that can, and often will, come back to haunt you financially. If the bank with large sums of money is unwilling to lend your friend or family member the money, then that is a red flag worth paying attention to now, not later.

If nothing else, understand that you are equally responsible in the event of a default on the loan. Offering up and considering alternatives may open up doors for you down the line instead of dealing with a potential financial albatross. In other words, saying "no" now, means "yes" later when you need good credit to make large purchases.