Co-Signing a Mortgage

[Fortuna]

My SIL is asking my wife to cosign a mortgage.  Here is the details:

1) House in Toronto valued at 800K she needs to renew the mortgage for $480k
2) She does not have a full time job and has never really had one for as long as I have know her
3) She is a responsible person but over 20 years has had to come to my wife for money which she has always paid back
4) She bought the house with a former friend who cosigned the first time. But over the past 5 years has not gotten full time work so that she is eligible for a mortgage
5) She gets her income from renting the 2nd apartment in the house and renting a couple rooms periodically during the day to life coach practitioners who use the "office" space.  She is also a Wellness consultant and does various adhoc counseling things 

She is looking to renew for 3-5 years and as cosigners we are of course responsible for the debt.  Her argument is that there is no risk because if she could not pay the mortgage she would sell the house.

I don't want to do this and so far have said no - but of course have feelings of guilt and it is hard because if she has nowhere else to go it may mean selling the house now.  My question is if you ignore the risk of rising interest rates and housing bubbles is it really as simple as saying sure if you get stuck sell the house?

Does the cosigner have the rights to force the sale or are you just responsible for the debt and have no control over that?  Is there anyone here who would do this!??!   

[CashFlowDepot]

Don't do it!  Your wife will also be personally liable for the loan.  Not good.

[iamlindoro]

Short answer, no.  Long answer, NOOOOOOOOOOOOOOOOOO!

There is literally nothing that makes this a winning proposition for you.  It's the intersection of poor finances and hurt feelings.  Just a recipe for destruction with absolutely no payoff.

[BlueHouse]

1.  Is the friend that she bought the house with on the deed?  Or was she just a co-signer? 
2.  If you co-sign, put your name and your wife's name on the deed. You can specify percentages for each owner.  You do not have to pay a penny to be on the deed. The mortgage is what makes you legally responsible for the payments.
3.  Does the  sister pay taxes on her business income?  If not, and you are on the deed, you may be held responsible or you could lose the house when the tax man finds out. 
4. It sounds like she already can't afford it, but is unwilling to sell it.
5.  Are you planning to buy anything soon that might be affected by your reduced available credit or debt load? 
6. Would I do it?  For my sister, yes. For your wife's, probably not.

[Josiecat]

No fu@$ing way.  If she can't afford the house, she needs to sell it.

[Mirwen]

Do you have $480k readily available that you would be willing to give her?  If not, SAY NO!

[Fortuna]

1.  Is the friend that she bought the house with on the deed?  Or was she just a co-signer? 
2.  If you co-sign, put your name and your wife's name on the deed. You can specify percentages for each owner.  You do not have to pay a penny to be on the deed. The mortgage is what makes you legally responsible for the payments.
3.  Does the  sister pay taxes on her business income?  If not, and you are on the deed, you may be held responsible or you could lose the house when the tax man finds out. 
4. It sounds like she already can't afford it, but is unwilling to sell it.
5.  Are you planning to buy anything soon that might be affected by your reduced available credit or debt load? 
6. Would I do it?  For my sister, yes. For your wife's, probably not.

I am planning to be FIRE in 3 maybe 4 years.  Which other than the other obvious reasons is why I don't want to be responsible for a mortgage.

Her biggest argument is just that she can sell if it does become a problem so why are we worried?

[Mirwen]

Because if she doesn't pay, it will affect your credit history.  You won't know until it is too late.

Because you'll have to keep tabs on if it's paid or not a this will cause you mental stress.

Because *you* can't sell it.  Only she can.

Because it may prevent you from buying your own place if you have this much debt owing already.

Because if it's a choice between foreclosing and paying the mortgage yourself, you'll choose to pay it and this can be used against you.

Because the banks don't think she can be responsible enough to pay it.

Because if something goes wrong it can hurt your relationship with your sister.

Because she already has a mortgage on it and is making payments, it's not your responsibility to risk your neck to save her a few bucks.

Because you have no interest in owning this house.

I can probably think of several more if I tried.  Do you need more?

[Rural]

Why are you even having a conversation about this?

[BlueHouse]

I am planning to be FIRE in 3 maybe 4 years.  Which other than the other obvious reasons is why I don't want to be responsible for a mortgage.

Her biggest argument is just that she can sell if it does become a problem so why are we worried?

The answer is in bold above
I would sit with your wife and talk about what will happen if the worst comes to pass. And the worst is not that the sister has to sell. It's that she won't sell and believes that just this once, in one month she can get her life back together...then one more month...then one more...
Really have the discussion about how it will affect your relationship with your wife. Will you resent the sister?  Will you resent the wife?  Will your marriage suffer? 
You do have an obligation to help family when they are in need. This is not the case. Unfortunately, if she loses her only source of income, it could become the need. You need to weigh the risks and outcomes of each approach.

What happened to the friend that she bought the house with? 
Is this friend a co-owner or merely a co-borrower? 
Is friend on the deed?

[money_bunny]

Resentment. You are the ant and she is the grasshopper.

A couple of years ago I pitched my Sister on she and her BIL buy a duplex by them. They were complaining they could not afford a house. I would partner with them. Mostly with down payment and repairs and then they could pay me back.

I'm really glad I did not. About 1/2 a year go they both got new cars. About 60-70K of machinery. I would have resented them not paying me back faster and instead buying shiny cars. They also are fancy pants cars as well.

[music lover]

When you co-sign a loan/mortgage, you accept all of the responsibility but receive none of the benefits.

She keeps 100% of the rental income, you get 0%.
The bank makes a profit charging interest, you make $0.

[CashFlowDiaries]

Dont do this!!

She will 100% regret this later.

[Dicey]

Short answer, no.  Long answer, NOOOOOOOOOOOOOOOOOO!

Perfect.

[Josiecat]

It's already a problem.  She cannot afford to live there without a co-signer.  This means she cannot afford this house.  She needs to move to something cheaper.

[expectopatronum]

She is looking to renew for 3-5 years and as cosigners we are of course responsible for the debt.  Her argument is that there is no risk because if she could not pay the mortgage she would sell the house.

She and I have very different ideas of what constitutes risk.

Or, she's only thinking there's no risk to HER, because she gets her loan and if she can't pay it, you're also stuck with it.

This sounds like the perfect way to ruin relationships with your wife, between your wife and SIL, between you and SIL. She already can't pay the mortgage (on her own, without a cosigner....) and should sell the house, but isn't. She has spotty income. That doesn't bode well.

[theoverlook]

What kind of a mortgage needs "renewed?"

But to the original question: NO NO NO NO.  As has been pointed out, you're essentially pledging half a million dollars to this person.  I don't care what your relationship is, that's not something you do.  At least not without major compensation.

[zephyr911]

Just thinking about these numbers makes me hyperventilate a little. Even with all that "equity", this is NOT a low-risk proposition! Toronto is quite possibly overvalued, and the same conditions that could prompt a sale could skew all the numbers against her.

If the market tanks, as it does from time to time, her place could EASILY lose enough market value to nuke most of her equity. If the economy takes a shit at the same time, which it normally does, and she stops getting rent, guess what? Not only is she unable to make the mortgage payment, she can't afford to maintain the house. Let's say this happens next year and she's paid down $5k in principal by then (balance $475k). Her $800K house is now worth $500K, which would let her walk away broke but owing nothing, so she goes for it. But the market is flooded and highly competitive, so without fresh paint and shiny new appliances, it doesn't sell. The balance starts going up a couple grand every month, and she gets a foreclosure notice. Do you step in and help? Do you jeopardize FIRE to save your credit?

This shit happens. It really did happen, to millions of people, just a few years ago. Maybe she'll be fine, maybe you'll go down with her when she's not. Your call :)

[tooqk4u22]

What kind of a mortgage needs "renewed?"

Canada doesn't have 30 year mortgages - the only do 5 Year, so there is interest rate and loan-to-value risk in short term intervals.



Regarding OP - I agree with others with NOOOOOOOOOOOO many times over but just to entertain the other side ask yourself if you owned the house (ignore investment returns for the sake of this argument) would you be willing to rent it to her? If it is yes then maybe it is ok, but only if you are on the deed and you have an attorney draw up a separate agreement that affords you the rigth to sell or buy the house if payments are not made.....you should also get something for the risk (although whatever it is wouldn't really compensate for the risk). 

[lostamonkey]

What kind of a mortgage needs "renewed?"

But to the original question: NO NO NO NO.  As has been pointed out, you're essentially pledging half a million dollars to this person.  I don't care what your relationship is, that's not something you do.  At least not without major compensation.

In Canada this is pretty normal. Most mortgages have at most 5 year terms and 25 year amortization periods.

[Fortuna]

Thanks to everyone for the feedback.  To answer some of the questions.

As mentioned by some here her 5 year term on the mortgage is up and it has to be renewed.  Since she has not changed her employment status to become eligible for I without a cosigner she needs one again.  As for her friend she is not in a position to do it again AND she loaned the SIL some money to renovate the house to be a rental which she has not completely paid back.  So I wonder if she could do it but is not willing to for that reason.

I knew what my response was and it is hard for my wife but she agrees with me.  We have said no - but this will come up again and I wanted to validate my reasons and see if people here could add some more.

[GizmoTX]

Decades ago my sister proposed our funding a second mortgage as a sound investment so she could buy a house in a new state she had moved to. She had a past successful history of handling house payments for over 10 years. Not with us. Unknown to us, she contracted for an interest only primary mortgage with the principal due in 5 years -- she figured she could refinance. In short, there was no way she could afford the house, but we only found this out the hard way. At some point she decided to "renovate" & put holes in the walls to see if they were load bearing or some such nonsense. Of course that made the house unsaleable & unrentable. She stopped paying our loan about 2 years in. When the balloon came due, she let herself get evicted rather than try to sell it. The primary bank came after us to see if we wanted to "save" our investment, but by then we certainly didn't want to put any more money into bailing her out when we wouldn't get it back & we didn't want an underwater house in a distant state. At least we didn't co-sign for the whole thing. She has never apologized & today acts like it never happened. We learned to always assume that "loans" are always gifts.

This is what banks are for. You are not a bank. If a family member can't swing a financial contract on their own, that's a clear sign that it's a terrible idea.