The days of finding a friend to cosign for a loan at the neighborhood bank are long over. All persons who sign on the line are now deemed co-borrowers and are responsible for repaying the debt.

"Co-borrowing is a big commitment and people need to take it seriously," said Nancy Chermak, vice president at First Mutual Bank. "Even when parents agree to be co-borrowers for their children, the folks need to understand that they are not off the hook until the loan is repaid. I had some parents once who helped their kids by co-borrowing. The kids were late on a few payments and it showed up on the parents' credit report a few years later when the parents wanted to buy a new home."

How the big lenders work

Most loans are sold in the secondary market where the Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac, are the two biggest players. Both require that the co-borrower occupy the home if the down payment is less than 10 percent of the purchase price. The co-borrower does not have to occupy the property if the down payment is more than 10 percent, provided that the co-borrower does not have a vested interest in the transaction (real estate agent, developer, etc.).

Cosigned loans insured by the Federal Housing Administration (FHA) can be for up to 97 percent of the purchase price of a property as long as the co-borrower is a relative of the borrower-occupant. If the co-borrower does not occupy the house and is not a relative of the borrower-occupant, FHA requires a 25 percent down payment.

"FHA will consider allowing a person with a long-standing family relationship to act in the role of a family member in specific situations," Cote said. "For example, I once worked on a loan where a dairy farmer co-borrowed for one of his employees. The employee's parents had passed away and the farmer had been caring for the employee for some time. FHA approved the loan with the farmer being considered as a family member."

What to expect on VA loans

Loans guaranteed by the Department of Veteran Affairs are even more stringent with co-borrowers. Since VA loans are based on the veteran's "entitlement," only the income provided by the borrower and his/her spouse will be considered, or the income provided by another veteran occupying the home.

Not all lenders are hard-nosed. "There are a lot of unmarried couples looking for homes and loans now," Chermak said. "Some have come out of previous situations that have put them in a tough financial spot. We look at all parties to the loan as one entity so some pluses can offset some minuses."

What consumers sometimes forget is that lenders need them as much as they need lenders. If a bank doesn't make loans, it will not make money. And lenders do not want to get properties back through foreclosure so they try to insure their bets by making everybody signing for the loan responsible.

If you are going to lend a helpful hand in a home loan, be prepared to follow up and make sure all payments are made on time. And if it is your intention to get out of the deal at a certain time or when the home appreciates to a certain level, have the borrower-occupant refinance the loan on his own.

Just remember that if you cosign, you can't plan to walk away until your name is clear.

(Copyright, 1995, Tom Kelly) Tom Kelly is a private real-estate consultant. His column runs Sundays in the Home/Real Estate section. Send questions and comment to: Tom Kelly, P.O. Box 70, Seattle, WA 98111