Not sure what co-signing a home loan entails?
If your family member or friend is planning to buy a property and has asked you to co-sign a home loan, you have to give that decision a lot of thought.
As a real estate company, RE/MAX Philippines ensures that our agents are ready to answer queries about housing loans. We asked Juan Patag, one of our professional RE/MAX brokers, to help shed some light on the subject and give information that will help guide you in making a decision. Juan Alfredo S. Patag used to work as a financial analyst at a local bank. Now, he is a professional licensed real estate broker for RE/MAX Philippines and serves as the Director of Research and Data at RE/MAX Capital.
Before you agree or refuse to cosigning a home loan, here are some important tips from Juan to guide you in making an informed decision.
First, a co-signer and a co-maker are not one and the same. A co-signer is someone who guarantees a loan obligation of a principal borrower, while a co-maker is someone who guarantees a loan obligation AND co-owns the asset collateralized by the loan.
"So, all co-makers are co-signers, but not all co-signers are co-makers. The main difference is that co-signers don't own the asset used as collateral for the loan. In the Philippine setting, the co-maker is more commonly called a co-mortgagor," said Patag.
Second, most local banks would only allow parents of a person to become a co-signer. According to Patag, banks usually wouldn't allow siblings or business partners to become co-signers because these people would likely prioritize paying their own loans over those they co-signed for.
So if you're not the main borrower’s parent, you probably wouldn’t be able to co-sign a housing loan.
Third, when a person becomes a co-signer to a loan, they guarantee the amortization and principal payments of the loan.
If the principal borrower does not make payments, the co-signer will be held financially responsible for repaying the loan. By practice, banks will only chase after the co-signer after the principal borrower misses several payments. When the borrower defaults on the loan or if the checks pre-issued in payment for the loan bounce, the bank may file a case against the co-signer, but would usually rather foreclose on the collateral.
"However, if the co-signer has collateral with the same bank for other loans – separate and distinct from the loan to which he became a co-signor – the bank may require the co-signer to update or rectify the defaulted loan (where he was a co-signer) for the release of any other collateralized property," said Patag.
So what does the co-signer need to do aside from affixing his signature to documents?
Patag states that co-signers should prepare the usual documents required as if they were borrowing personally, such as Tax Identification Number, certificate of employment, and proof of mailing address. The banks would need this to conduct the same credit investigation as if they were borrowing money themselves.
Will being a co-signer affect an individual's credit standing?
"In the Philippines, we don't have individual credit scores like they do in the United States. We do have a 'Negative Database' (more commonly called 'NDB' by bankers), a shared platform among all banks under the supervision of the Bangko Sentral, that collates an individual's total loan exposure (car loan, home loan, credit cards, etc.). So these banks are fully aware of the total loan exposure of individuals. When a person becomes a co-signer, the loan amount will be reflected in his total loan exposure in the NDB," said Patag.
One of the biggest risks in co-signing a home loan is it could cause a strain on relationships with family members, especially with one's parents, siblings, and close friends. That’s why it is important to have a professional guide you. A professional real estate broker should be able to assist their clients in matters like this. If everything goes well, being a co-signer for a housing loan that is successfully paid for eventually would help the main borrower acquire their dream home, and that is priceless.
Forbes, “What To Know Before Cosigning A Loan”
Investopedia, “What Are Cosigners Liable and Responsible For?”