Considerations before Co-Signing

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.

BMacGregor

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 bmacgregor@mmlk.com or at (859) 231-8780.

This article is intended as a summary of federal and state law activities and does not constitute legal advice.

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Buying a Home? Do This First!

Potential home buyers can spend years saving for a down payment, months creating a budget, and weeks looking at properties before making the plunge. Too often, though, they overlook a crucial step on the path to purchase: checking their own credit report and credit score. Your credit report and credit score could be the keys to unlocking that white picket fence to your new home. Let’s take a look at why this is so important.

The Credit Report

A report is the laundry list of your credit history. Credit cards, student loans, car payments, past mortgages, etc. are all detailed, along with whether you are in good standing for each of the accounts. Reports reveal who is examining your credit report (such as lenders) and contain some personal information (such as employment history and bankruptcy filings).

There are three credit-reporting bureaus: TransUnion, Equifax, and Experian. Each of these bureaus issue separate credit reports for individuals. They also issue a unique credit score.

The Credit Score

Rather than sifting through lengthy credit reports to assess lending risks, financial institutions make loan decisions based on, in part, one’s credit score (often called the FICO score). The scores are meant to signal how well a consumer will handle future credit. The  majority of mortgage lenders use FICO as the means to determine the type of loans buyers qualify for and the appropriate interest rates.

Consumers are often frustrated with the fact that there is no exact formula for determining a score. Each bureau creates its own, taking into account a variety of factors, including, but not limited to, the length of credit history, type of accounts, payment history, and the ratio of debt to credit limit. Even the score range is not uniform, though the scale is generally between 300 and 850.

What is a “good” credit score for homebuyers? Well, that can be hard to generalize, but to obtain an FHA loan (one of the most common for first-time buyers), a credit score of 620 or above is preferable. Those with a score over 720 are considered to have excellent credit.

Why Should I Check It?

Reports and scores are not free from error. Unfortunately, many of them are subject to it. A 2013 Federal Trade Commission report found that 20% of consumers have errors on their credit reports, and for 5% of consumers those errors are enough to affect their credit scores. With these statistics in mind, it is an absolute must that potential homebuyers check theirs for accuracy.

Individuals are entitled to one free credit report each year from each of the three bureaus. These reports can be obtained all at once or at different intervals. To get your free copy, visit www.annualcreditreport.com or call 1-877-322-8228. In addition, www.myfico.com can provide scores, but be wary of any fees that may apply. Review the information carefully and dispute any mistakes in writing. Under the Fair Credit Reporting Act, both the credit reporting company and the information provider (that is, the person, company, or organization that provides information about you to a credit reporting company) are responsible for correcting inaccurate or incomplete information in your report.

Fixing inaccuracies can be a lengthy process; this is why reports and scores should be reviewed well in advance of trying to secure funding for a home. Don’t let three digits stand between you and your home-buying dream. If you would like more information or have discovered an error and need help in correcting it, contact the real estate attorneys at McBrayer.

For more information on how credit scores can affect a mortgage, please view the Understanding Mortgage Credit Scores guide from Zillow.

J. Markham

 

Joshua J. Markham is a member at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Lexington, KY office. Mr. Markham practices in virtually every aspect of real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, lease negotiation and preparation, and any and all other needs related to residential and commercial real estate matters.He can be reached at jmarkham@mmlk.com or (859) 231-8780, ext. 149.

This article is intended as a summary of  federal and state law and does not constitute legal advice.