Can You Take Out a Home Equity Loan With Your Child?

Taking out a home equity loan is one way to access cash when you need funds. You can use the money to consolidate high-interest debts, pay for home improvements or repairs, or cover a large, unplanned expense. Getting approved for one may require a co-signer if you don’t meet the lender’s approval requirements. Parents can take out a home equity loan with their adult children, though it’s important to understand what that means financially.

How a Home Equity Loan Works

A home equity loan is taken out against your home equity, using your home as collateral. Equity represents the difference between what’s owed on the mortgage and what a home is worth. Home equity loans can be appealing to homeowners who need a lump sum of cash and are comfortable repaying what they borrow with interest.

The amount of home equity you can tap into is determined by the lender, and they generally prefer that you borrow no more than 80%. Final approval for a home equity loan is based on how much equity you’ve accumulated (based on the outstanding mortgage balance and the fair market value of your home), as well as your credit score and history, income, and debt-to-income (DTI) ratio. There is no mandated credit score that’s required to get a home equity loan, though the credit bureau Experian says that a score of 680 or higher should do. In general a higher score means easier approval and a lower interest rate.

Home equity loans have fixed interest rates and repayment terms. For example, you might have 15 years to pay back your loan in monthly installments. Home equity loans typically have higher rates than first mortgages, because they present more risk for the lender. Defaulting on a home equity loan could put you at risk of losing your home if the lender initiates a foreclosure proceeding against you.

Can a Parent Co-Sign a Home Equity Loan for a Child?

Lenders look closely at your credit score and history when approving home equity loans. If you have a lower credit score, the lender may either decide it’s not worth the risk and deny you the loan or approve you but charge a higher interest rate.

A parent can step in and act as a co-signer or co-borrower for their child in order to smooth the way to approval. A co-signer is someone who agrees to share joint responsibility for repaying a loan or line of credit. Having a co-signer can work in a child’s favor if their parent has a strong credit history and a high credit score. The lender may be less reluctant to approve them, and they could lock in a great rate on the loan.

Financial Implications of Co-Signing a Home Equity Loan

It’s important for parents to know what they’re agreeing to before taking out a home equity loan with their child. Co-signers are liable for the debt in the eyes of the lender, so if the child who owns the home defaults, the lender could go after them or the parent who co-signed to recoup the money that’s owed. If the lender forecloses, the child would lose the home, and the foreclosure would show up on both their and their parent’s credit reports.

Foreclosures can cause you to lose points from your credit scores. They can also remain on your credit reports for up to seven years. That could make it harder for you to be approved for loans or lines of credit. Lenders who approve you may charge higher interest rates if your credit score takes a hit because of a foreclosure.

For this reason it’s important to discuss how a home equity loan will be repaid before agreeing to co-sign. For example, if your child is unable to pay, will you agree to step in and make payments in order to avoid default? If you’re unwilling or unable to do so, then co-signing a home equity loan may not be the right choice.

The Bottom Line

Home equity loans can be a source of ready cash for homeowners who have equity and meet a lender’s eligibility guidelines. Co-signing a home equity loan with your child may be necessary if they’re unable to get approved based on their own creditworthiness. Keep in mind, however, what co-signing may mean for you and your credit score if your child is unable to repay what they’ve borrowed.