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My good friend, who I have known since we were kids, asked me for a favor today. He originally intended to get a house with his now ex-girlfriend so that he could invest in one and later on, sell it.

The favor is the following: he wants to put my name down in buying the house with him since he cannot "afford" to do it alone. By this, he means the bank is willing to loan him 3x–4x the amount of his salary—but that's not enough. So, they would take my salary into account in order to arrive at the amount he needs to get the house. HE does not need any money from me, and he says he can remove my name after one month through something called Transitional Arrangement. (He compared it to a couple breaking up and the house being transferred entirely to one person in an agreement).

What he needs from me is for me to sign something, and 3 months' bank statements and 3 months' pay slips.

What are the risks, if any, could I be facing?

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    I answered a very similar question here, money.stackexchange.com/questions/27941/… All of the comments there are applicable here. – ChuckCottrill Mar 1 '17 at 1:35
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    What *precisely does "the bank loan is giving him 3x/4x the amount of his salary" mean?! – David Schwartz Mar 1 '17 at 7:28
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    A diligent mortgage agent may refuse to accept such an arrangement when they learn that you are not truly 'in it together' - but if they don't, that doesn't mean it isn't a terrible idea. Form a limited company with terms that adequately protect you and buy the property through it if you are truly insistent on helping this person. – Tom W Mar 1 '17 at 10:51
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    @DavidSchwartz I'm guessing they mean the total loan amount is 3-4x his yearly salary. That seemed outrageous to me too, but I did the math based on my own salary, and the payment would be 1/3 my monthly salary (after taxes) at the high end. Seems reasonable if you have no other debt, though that's probably not the case here. – Kat Mar 1 '17 at 17:41
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    Comments are not for extended discussion; this conversation has been moved to chat. – GS - Apologise to Monica Mar 6 '17 at 19:06

10 Answers 10

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That "something" you are signing means you are liable for the mortgage payments - yes, all of them - if he can't or won't pay at any point.

The limit on what the bank will lend him based on his salary is there for a reason - they don't expect him to be able to keep up repayments if they lend him more (or more precisely, there's a big risk that he won't). Don't forget that even if he swears up and down to you that he can afford them, interest rates can rise; this is a 25 or 30 year commitment you would be making. Interest rates are at a historic low and the only way from here is up; in my living memory rates have been 12% or even 15%. As a very rough rule of thumb, for every £100k borrowed, every additional 1% on the interest rates costs an additional £100 on your monthly payment.

Also, the "Transitional Arrangement" is not without its own fees and the bank won't let him simply take you off the mortgage unless they are convinced he can keep up the repayments on his own, which they clearly aren't.

Also thanks to @Kat for the additional good point that being on the hook for your friend's mortgage will prevent you from being able to get a mortgage yourself while the liability still exists, or at least severely limit your options. No matter how many times you protest "but I'm not paying any money for that!" - it won't help.

Another point: there are various schemes available to help first time buyers. By signing up for this, you would exclude yourself from any of those schemes in the future.

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    I'm not sure if this is applicable in the UK, but in the USA, it could make it really difficult to obtain a mortgage of your own. Even if they make all the payments on time, you are still responsible for it, and creditors will consider that before extending you more credit. If that is relevant, consider adding it to your excellent answer. – Kat Feb 28 '17 at 23:39
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    Kat is correct, this will totally ruin YOUR chances of getting a mortgage (and loans, and credit cards) as you are (in the eyes of any lender) already liable for an entire mortgage on another property. A mortgage will be written in big flashing letters across your credit history forever. – John U Mar 1 '17 at 10:11
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    @JohnU: excellent point. This way OP has an excellent soft reason to decline: he/she'll be considering a mortgage of their own in "near future" – unperson325680 Mar 1 '17 at 10:37
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    @TonioElGringo Yes, variable rates and base rate trackers are very common in the UK. Even fixed rates are only fixed for a small number of years compared with the lifetime of the mortgage, and once that fix is up you have to renegotiate / re-search for the best deals. In general, you pay more for a fixed rate mortgage (in return for the security of knowing exactly what your monthly payments will be). – Vicky Mar 1 '17 at 14:19
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    @TonioElGringo a standard mortgage in the USA has a fixed rate. There are other options, but they're generally considered a bad idea. I too cannot imagine getting a 30 year loan with a variable rate! It sounds like the UK is different, though. – Kat Mar 1 '17 at 17:29
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What are the risks, if any

The risks are exemplified by the outcomes presented on this website, including:

There's a chance you will end up paying large mortgage payments on a house occupied by an ex-friend and paying large amounts of money to lawyers to try and get things straightened out. You could come out of it a lot poorer and with your credit rating wrecked.

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    Oh, I want to bounty this. – deworde Mar 1 '17 at 10:35
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    by an ex-friend ...!! :D – The Coder Mar 1 '17 at 10:52
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Wrong way round. Transitional arrangements are non-binding guidelines that the lenders can observe if they choose to. The borrower - like your friend - doesn't get to choose whether to use them or not.

Your friend obviously can't afford the property, so if you do this, all I can say is congratulations on buying your new house, and I hope you got a deal on the mortgage.

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    The friend has the house. The OP has the mortgage. – D Stanley Feb 28 '17 at 22:48
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    @DStanley That's his point - if he is signing that mortgage he is essentially buying the house. – BlackThorn Feb 28 '17 at 23:01
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    @TBear Maybe in the UK it's different, but in the US a cosigner has no ownership of the house unless he/she is on the deed, too. So the only thing the cosigner gets is the mortgage, not the house. – D Stanley Feb 28 '17 at 23:26
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    @TBear Except, legally speaking, the OP is probably not buying the house, in the sense they probably aren't getting any sort of legal rights to possess, occupy or resell the property. -- They're on the hook for paying for it, without (necessarily) any of the benefits from actual ownership. (Disclaimer: I don't know UK law, so it may be that co-signing grants partial ownership. Though the safe call is to assume that it doesn't, until proven otherwise.) – R.M. Feb 28 '17 at 23:26
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    @R.M. - The OP has been a bit thin on detail in this regard, but based on my (limited) knowledge of UK mortgages I wouldn't expect the OP to be a "cosigner" (which I think is equivalent to "guarantor" in the UK); I would expect them to be a joint owner. I don't think a mortgage company in the UK would take someone else's income into account unless they were owning the property. – AndyT Mar 1 '17 at 10:58
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You should only loan money to friends or relatives if you are fully accepting the possibility of never ever getting that money back.

And in this situation it can happen that you will be forced to give him a very large loan if something bad ever happens to him. (Paying the monthly rates instead of him and expecting he will someday pay it back to you is technically the same as loaning him money).

Something might happen in the future which will result in him not paying his monthly payments. Maybe not now, but in 5 years. Or 10. The economy might change, he might be out of a job, his personal values might change. A house mortgage is long term, and during that time a lot can happen.

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    You should only loan money t̶o̶ ̶f̶r̶i̶e̶n̶d̶s̶ ̶o̶r̶ ̶r̶e̶l̶a̶t̶i̶v̶e̶ if [...] – njzk2 Mar 6 '17 at 4:45
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    @njzk2 : the point in friends or relatives is that they can much more easily guilt you into letting them slip with the repayment, or might put pressure on you with badmouthing or threatening to badmouth you among other friends or relatives ("look at that miser who is constantly harassing me for that insignificant little money I owe him, he can't talk about anything else than money"). And suing them can get you in trouble with other friends and family members who will constantly try to talk you down or even shun you. – vsz Mar 8 '17 at 17:18
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Something else to consider, even if your friend is on the up and up and never misses a payment: Until the house is paid off, any time you apply for credit banks will count the mortgage payment on your friends house against your ability to pay all your existing debts in addition to whatever new loan you're applying for. If you're renting a home now, this will likely mean that you'll be unable to buy one until your friends house is paid off.

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Short answer: don't do it. Unless you know something that the bank doesn't, it's safe to assume that banks are a lot better at assessing risk than you are. If they think he can't afford it, odds are he can't afford it regardless of what he might say to the contrary. In this case, the best answer may be "sorry for your luck;" you could recommend that he comes up with a larger down payment to reduce his monthly payment (or that he find a way to get some extra income) rather than getting you to cosign.

Please also see this article by Dave Ramsey on why you should never cosign loans.

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    This. Assume that you will, at some point, be 100% liable for the payment, principle, taxes, insurance, interest, landscaping, roof repair, water main repair, and all the other things. – MikeP Mar 7 '17 at 21:58
  • @MikeP I agree, seems like there's a good chance of that here. There's not even an upside to the OP. – EJoshuaS - Reinstate Monica Mar 7 '17 at 23:32
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Both of you sit down with a lawyer who practices in real estate and foreclosures, and hash out every single possibility of what could conceivably go wrong, with nothing out of bounds. Come up with a reasonable and fair plan for resolving each situation, that you are willing to commit to, life and breath, for real, no exit. Put all of it into a legal commitment between you two.

However this is a fearless, searching and even ruthless contemplation, requiring a level of intimacy and personal responsibility you may not be comfortable with. and there's absolutely no room for dancing around unspoken questions. So in essence, it puts the hardest stuff up-front. If you put that much thought and honesty into it, you'll probably be OK.

But you probably won't want to be that honest, or won't want to do the deal after you do.

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This is not a full answer and I have no personal finance experience. But I have a personal story as I did this. As Vicky stated

Another point: there are various schemes available to help first time buyers. By signing up for this, you would exclude yourself from any of those schemes in the future.

I did this for my dad when I was 16 or so. I am in Canada and lost $5,000 first time buyers tax rebate. As long as many other bonuses like using your rsps for your first home.

I also am having a fair amount of trouble getting a credit card, because even though I am only a part member of the mortgage they expect you to be able to cover the whole thing. So when the banks look at my income of say $3000 a month they say "3000 - rent(500) - mortgage(3000)" You make $-500 a month. I then explain that I do not actually pay the mortage so it is not coming out of my paycheck. They do not care. I am responsible for full payments and they consider it used.

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The risk is that you will owe the bank the principal amount of the mortgage.

Based on your question it would be foolish for you to sign. Anyone who describes a mortgage as "something" obviously has no idea what they are doing and should never sign a mortgage which is a promise to pay hundreds of thousands of dollars.

You would be doubly foolish to sign the mortgage because if you are guaranteeing the loan, you own nothing. So, for example, if your friend sold the house, pocketed the money, then left the country you would owe the full amount of the mortgage. Since you are not on the deed there is no way you can prevent this from happening. He does not need your approval to sell the house.

So, essentially what your "friend" is doing is asking you to assume all the risk of the mortgage with none of the benefits, since he gets the house, not you. If a "girlfriend" is involved, that just increases the risk you will have a problem. Also, although it is not clear, it appears this is a second house for him. If so, that disqualifies him from any mortgage assistance or relief, so the risk is even higher.

Basically, it would foolish in the extreme to co-sign the loan.

  • He can't sell the house and pocket the money in the UK (or can't do it legally anyway): the mortgage provider will have a charge on the house. – AndyT Mar 8 '17 at 11:15
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If you really want to help your friend buy a house, make a counter-offer to buy the house yourself and lease it to your friend, with the option to buy for original purchase cost, plus all interest paid so far to the bank, plus closing costs and other expenses incurred by you, minus payments made so far by the friend. Otherwise, just no. The other answers already detail why.

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    This is still mixing money and friendship (often considered a bad idea), but it does so in a way that actually ties up significant capital from the OP, with no financial reward. If you really think you want to do something like this, you need to charge your friend a profitable amount of money - like the market rate for rent, and you need the ability to sell it for the capital gain later. Still a very bad idea (would you really be able to evict your friend, emotionally, if it made sense, financially?), but puts it in context of what you're actually giving up when you do this. – Grade 'Eh' Bacon Mar 2 '17 at 16:27
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    I agree with all @Grade'Eh'Bacon's points. Not sure why this answer merits the downvotes. I don't think it's what OP should do; it's just a way to put things in perspective and lay down what the "fair" way to setup such an arrangement might look like. As commented, some other adjustments to make the deal beneficial (not just a headache) to the OP would have to be made for this to be a real course of action. – R.. Mar 2 '17 at 19:07
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    I don't usually comment on my down-votes, but in this case I will, to be clear on my comment: I do not believe that the course of action described here is 'fair'. It suggests that the OP should take on the risk of real-estate ownership, with none of the benefits, while at the same time jeopardizing the current friendship by mixing it with money. If you do not think it is what the OP should do, I don't think it's a very valuable answer, at least without you outlining the factors making it a bad idea, highlighting the alternative you prefer. – Grade 'Eh' Bacon Mar 2 '17 at 19:29
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    I think it's what OP should be prepared to do, since this is effectively what his friend is asking him to do. And this portrays it more accurately, so all can see what's going on -- rather than conceal it in language like "put my name down for". @Grade'Eh'Bacon "No financial reward", same is true of a co-sign! The question isn't "is there reward" but "is this right, all things considered" since there's more to relationships than money. R's view helps him grasp the depth of this. – Harper - Reinstate Monica Mar 2 '17 at 22:05
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    @Harper: I disagree; what the "friend" is asking for and my answer are very different arrangements. The friend is asking OP to be on the line to pay his mortgage for 30 years (or deal with default/foreclosure and the credit fallout of that) if he doesn't make payments. My answer has OP taking on a loan for property OP would actually own and could sell or rent to someone else if needed. – R.. Mar 3 '17 at 0:32

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