Having someone co-sign on a loan is a great way to get into a car or home if you don't have the credit score (or tax returns, for those self employed) to support a purchase. Not that co-signing is just done by Parents (anyone can co-sign), but Parents often co-sign loans for their kids. Be careful though... If you live in one of the nine community property states listed below, one-half of a married couple co-signing usually obligates both to the debt.
Nine Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
You see, co-signing makes the co-signer (i.e. Mom & Dad) just as responsible for the debt as the main signer (i.e. Son or Daughter). So, if the co-signer is married, it makes their partner equally responsible. If payments are not made (or made late), it can adversely affect the credit of both the main signer and both co-signers. It is for this reason, the Federal Trade Commission has a web page specifically about co-signing. See it here:
http://www.ftc.gov/bcp/conline/pubs/credit/cosign.shtm

On a related topic, even though one-half of a married couple may be the one to qualify for a loan, and only the one name is on the loan paperwork, BOTH parties need to sign the sales contract in community property states. The reason: even though the wife (for example) may be the one who qualifies for the loan (i.e. makes the money and has good credit), the husband must also agree to buy the home because their assets will jointly pay for the home. Even if he's a stay-at-home Dad (i.e. no income), in community property states, courts have ruled that Mom wouldn't be able to work and pay for the home without Dad watching the kids, cleaning house, running errands, etc. So be careful... if you have a contract to sell your home to one party, and it turns out they have a "better-half", things could get messy if that spouse decides against the purchase (i.e. they never signed the contract and half of the funds to purchase, in theory, belong to them).

Back to the point at hand though (and a common related question): After Mom & Dad have co-signed, how do we get their names off the loan so that they are no longer liable? Well, the mortgage lienholder has three parties responsible for the loan (which is always better than one). So, they'll probably never remove anyone by choice. The best way to do this is to refinance the loan once the kiddo has improved their credit and/or established better income via subsequent tax returns. They can't say anything if you pay them in-full with a new loan in just the Son or Daughter's name. Of course, you could always try just asking your mortgage lender nicely to remove the co-signer... just listen carefully for the laughter.

Ryan Cave, The "Caveman"
Truth, Honor & Personal Integrity
214-789-9366
www.CaveRealty.com