What Legal Obligation Do You Have If Your Name Is on a Mortgage & Not on the Deed?
A person who signs a mortgage loan, but is not on the deed for the collateral property, is responsible to repay the mortgage only after the lender exhausts the collateral through foreclosure. Most state laws require mortgage lenders to first foreclose on the collateral property, and only then can the lender pursue a collection action against borrowers on the promissory note.
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Background
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A mortgage is a loan that consists of two different legal obligations. The first obligation is represented by a promissory note under which the borrowers promise to repay the money borrowed. The second legal obligation is the granting of a mortgage lien on the collateral property. Only a person who is named on the property deed can allow a mortgage lien to attach to that property.
Guarantor
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The person who is not on the collateral property deed is simply a guarantor of collection on the loan. In other words, the person not on the deed is responsible only under the promissory note. This means that person will not lose any of their property, though that person may have to pay something on the mortgage note if a foreclosure does not raise enough money to pay off the full balance on the mortgage loan.
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Foreclosure
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The first thing a lender does after a borrower defaults on a mortgage loan is foreclose on the collateral property. Foreclosure is a legal process that involves the lender having the collateral property sold by public auction. The lender applies the sales proceeds as a credit to the outstanding balance of the mortgage. Anybody on the deed to the collateral property stands to lose their rights in the collateral property. Anybody not on the deed does not lose anything in foreclosure.
Deficiency
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Sometimes a foreclosure sale does not raise enough money to pay off the full amount owed on the mortgage loan. This means there is a deficiency owed on the mortgage. For example, if the mortgage balance is $200,000, but the foreclosure sale on the collateral property raises only $175,000, then there is a $25,000 deficiency. At this point, anybody who signed the promissory note may be responsible to cover the deficiency. To enforce a deficiency, the mortgage lender must file a deficiency lawsuit in state court and obtain a court order allowing the lender to collect the deficiency. The deficiency judgment is a cosigner's primary obligation on a mortgage when that person is not also on the deed to the collateral property.
Credit
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If you co-sign on a mortgage loan, and the principal borrower is late in his payments or defaults on the mortgage loan, then the mortgage lender can report this on your credit history. This can harm your credit score, just as it harms the principal borrower's credit score.
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References
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