Question: I have been asked to co-sign a mortgage. I am not thrilled by this request, but because a cousin is buying I have a sense of obligation to help. If I co-sign, what percentage of the loan must I re-pay if the buyers default?
Answer: Co-signing a loan is a serious matter. In essence, you agree that if the borrowers cannot make good on the debt, the lender can come to you for re-payment. Unless there is language to the contrary, your re-payment obligation is equal to 100 percent of the outstanding debt and NOT just a portion of the loan.
Also, as a co-signer you may reduce your own ability to borrow and missed payments may impact your credit score.
But, as a co-signer you do have some protections.
Imagine that a home is being purchased for $200,000, the borrowers are putting down $20,000 in cash but they cannot get a mortgage because of poor credit. You co-sign the $180,000 loan, the lender is happy, the mortgage is created, the buyers move in and everything is wonderful – except that two years down the road the borrowers lose their jobs and the mortgage goes into default.
It may also be true that you just lost your job or don’t just happen to have the equivalent of a full mortgage payment in your pocket each month.
In such circumstances, the best option may be to sell the home. If you can only get the original sale price it’s likely that the loan will be paid in full – and the buyers will lose much or all of their $20,000 equity in the form of marketing costs, closing fees, etc. If you can get more than the purchase price, then so much the better – you may actually get back all the equity plus a profit.
Or, if possible, rent for an amount equal to at least mortgage interest and principal, property taxes and property insurance – in other words, enough rent to break even.
But what if property values have declined? Or the property can’t be rented?
In any situation where the monthly payment will be late or cannot be paid, contact an attorney or legal clinic and then have the lawyer immediately contact the lender. Why? Because a sane lender does not want a foreclosure. What a lender wants is to be re-paid. See if payments can be deferred or reduced until the home is sold or rented. Lenders routinely offer such options in the case of natural disaster, and some will help when money problems arise – but you must contact the lender to see what can be worked out.
If you do elect to co-sign, have your attorney prepare a proper, written agreement between you and the other borrower outlining the complete arrangement. This will be hugely important if there’s a future dispute or loss.
Syndicated originally by Content That Works and posted with permission.