A mortgage is a loan where real estate is used as collateral. Borrowers have many rights and responsibilities. Cosigners of mortgages have many of the same rights and responsibilities as the primary borrower. Cosigning a mortgage opens up the cosigner to various risks as well. Careful deliberation needs to be used prior to agreeing to cosign.
Rights of Cosigner
Cosigners share nearly all of the same rights as the primary borrower on a mortgage. One right that is not automatic is ownership of the property.When cosigning on a purchase mortgage, the cosigner is an owner as long he/she is party to and signs the warranty deed and security instrument. These are the documents that transfer ownership to the new parties. For a refinance mortgage, preparation and execution of a vesting deed is required to provide the cosigner with ownership rights.
Responsibilities of Cosigner
Cosigners have the same responsibilities as all other borrowers on a mortgage. Payments made to the lender are the responsibility of the signers of the mortgage. If multiple borrowers, such as the case with a cosigner, then if one borrower does not make payment, the lender will look to the other borrower. Property that the mortgage is taken out on is held as collateral by the lender. The lender can become legal owner of the property if payments are defaulted.
Risks to Cosigner
The primary risk to a cosigner is to the individual's credit score. If payments are not made in a timely manner, the cosigner's credit score will be negatively impacted along with the other borrower's. Another risk could be monetary loss. If the cosigner also provided down payment funds for purchase and if payment default and/or foreclosure occurs, then the cosigner will have no way to recoup money. One more possible risk could be to the cosigner's own property. This can occur if the cosigner's property was used as collateral or if defaulted property has less value than what is currently owed. Finally, a bad experience cosigning a mortgage can lead to strained personal relationships.
Pros of Cosigning
There are pros to cosigning that go hand in hand with the risks. The cosigner's credit score can greatly improve with an excellent payment record of mortgage. This can also improve the other borrower's credit rating. Ownership of real estate is a definite investment. Cosigning for merely credit worthiness reasons can lead to a substantial financial return with little to no monetary commitment. A stronger relationship can build out of the assistance provided by cosigning.
The primary reason a person will cosign a mortgage is to strengthen the credit profile the lender is looking at. A borrower may have a below average credit score or low income. The cosigner's credit score and/or additional income reduces the risk for the lender and allows for the loan to be made. Another reason to cosign is to build a relationship. A couple looking at marriage in the future may take a loan together to "test the waters."
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