Do Foreclosures Affect Both the Primary and Cosigner?

A mortgage loan allows a borrower to purchase a house that he cannot afford to buy with cash. Depending upon the borrower's credit and employment history, the lender may require the borrower to obtain a cosigner on the loan. Cosigning can help a friend or relative buy a home, but can be risky if the lender subsequently decides to foreclose on the property.

Considerations

A cosigner is responsible for the mortgage loan debt if the primary borrower fails to make the payments. The cosigner accepted this responsibility when he signed the loan documents and agreed to be a cosigner. Once the borrower falls behind on the loan payments, the lender attempts to collect those funds from the cosigner. If the lender is unable to secure payments from the cosigner, the lender may pursue a foreclosure on the property and this affects both the borrower and the cosigner.

Significance

A foreclosure means the lender takes possession of the property from the borrower. It is a legal proceeding and is a matter of public record. Credit bureaus collect data from public records and place this information on a consumer's credit report. A foreclosure appears on the report under a section entitled "Public Records" and remains on the report for up to seven years from the date of foreclosure. It appears on the credit reports of both the borrower and the cosigner. Any late payments that preceded the foreclosure also appear on the credit reports of both parties.

Credit Scores

The appearance of a foreclosure on a credit report can cause significant damage to a credit score. Part of your FICO score, 35 percent, measures how well you pay your credit obligations. According to MSN Money, a foreclosure can drop your FICO credit score from 85 up to 160 points. That could mean the difference between a good credit score and a bad one, depending upon what your score was prior to the foreclosure. This negative information impacts the scores of both the borrower and the cosigner.

Warning

A foreclosure divests the borrower of ownership of the property, but that may not be the end of it. Certain states, like Florida, New York and Texas, are recourse states. This means the lender can sell the home obtained in foreclosure then pursue the borrower and cosigner for the deficiency amount. Deficiency is the difference between the selling price of home after foreclosure and the amount still owed on the mortgage loan. The lender can sue to obtain a deficiency judgment against the borrower and cosigner. State laws vary but in most states, a deficiency judgment gives the lender the legal right to garnish bank account funds, a portion of wages and to place a lien on other property owned by the borrower or cosigner up to the amount owed under the judgment.

References

• Business Dictionary: Co-sign
• CNN; You Lost Your House - But You Still Have To Pay; Les Christie; February 2010
• Nolo; Tips For Collecting Your Judgment; Robin Leonard
• myFICO: What's In Your FICO Score
• MSN Money; 5 Ways To Kill Your Credit Score; Liz Pulliam Weston; November 2009
• myFICO: How Do Public Records and Judgments Affect My FICO Score?
• Bankrate.com; There's Little Hope For A Cosigner; Steve McLinden; May 2009

Resources

• myFICO: What's In Your Credit Report