When I was looking for my first apartment, I was a student, had little money and was far from an ideal tenant. Luckily, my parents co-signed on the lease and I was handed the keys to my new place. At the time, I had no idea what risks my parents were taking by putting their signature next to mine on that lease agreement. Now, as a real estate attorney, I often see people co-signing on mortgages – generally a much bigger financial obligation than an apartment – and I wonder if they have considered the hazards associated with signing their name on the dotted line. Not every co-signing situation ends badly, and some work out with no problems at all, but there are times when a co-signor bites off more than they can chew and, as a result, are left with a very bad taste in their mouth from the whole closing process. If you are thinking about serving as a co-signor, I urge you to consider the following:
1) It will affect your credit report.
If someone has asked you to co-sign on a mortgage it is generally because you have good (or at least sufficient) credit. A co-signed mortgage, like any other loan, will be factored into your credit report, even if you are not making payments. It becomes part of the equation in your debt-to-income ratio. If you apply for a personal loan in the future, it is possible that you could be denied the loan based on the mortgage’s outstanding debt.
2) You are 100%, not half, liable.
Just because there are two names on the mortgage does not mean that you are only signing up for 50% of the loan liability. If the mortgagor fails to make his or her payments, the lender can look to you for the entire outstanding loan amount. If the lender only sues you for the outstanding amount (which is legally permissible) and you want the mortgagor to also be responsible for the debt, then you will have to sue him or her in order to bring them into the lawsuit.
3) It is difficult to undo
Co-signing for a loan can be undone, but will require effort from both parties to the mortgage. The only ways to have your name removed as a co-signor are to refinance the mortgage or sell the property. If the mortgagor falls on hard times or your relationship with them sours, it is less likely they will agree to refinance the loan to remove you from the mortgage, or that the bank will permit a refinance to remove you as co-signor in light of the other parties’ financial situation.
Co-signing for a mortgage can be risky and it is important to make an informed decision. For many, when faced with the request from a loved one, saying no can be difficult. If you find yourself in this hard spot, consider contacting a McBrayer real estate attorney about your options. In some cases, there might be other ways to help the individual obtain the loan, such as gifting a part of the down payment on the property. We can work with all parties to achieve the best possible outcome.
Brittany C. MacGregor is an associate attorney practicing in the Lexington office of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She is a graduate of Transylvania University and the University of Kentucky College of Law. Ms. MacGregor’s practice focuses on real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, and lease negotiation and preparation. She may be reached at firstname.lastname@example.org or at (859) 231-8780.
This article is intended as a summary of federal and state law activities and does not constitute legal advice.