If you enjoy good credit and stable assets, a friend or family member may ask you to help them obtain a new mortgage by co-signing the home loan. When you co-sign a loan, you pledge your assets to the lender in the event the primary borrower cannot or does not make his mortgage payments. The co-signer and the borrower suffer negative consequences should missed mortgage payments result in a foreclosure.
Co-signing is not as simple a process as it appears on the surface. When you co-sign a loan for someone else, you aren’t merely signing your name – you are accepting full legal responsibility for the loan payments without enjoying any of the benefits of ownership. As a co-signer, the bank will notify you of an impending foreclosure and give you the opportunity to pay the borrower’s overdue debt and bring the loan current. If you cannot or will not pay the defaulted amount, the property goes into foreclosure.
A co-signed mortgage appears on your credit report. Thus, each payment the primary borrower makes or misses also appears on your credit report. The missed payments leading up to foreclosure significantly damage your credit rating – as your payment history on your debts accounts for 35 percent of your credit score.
The foreclosure itself also appears on your credit report. Foreclosures impact each consumer differently, depending on her current credit information, but the impact is always a negative one. According to the Fair Credit Reporting Act, both missed payments and foreclosures remain on your credit file for up to seven years.
If the foreclosure sale fails to net enough proceeds to pay off the balance the primary borrower owes, both of you are legally responsible for paying the remainder of the loan – known as a “mortgage deficiency.” The mortgage lender has the right to pursue of you independently of the other, depending upon which of you is most likely to submit payment. In most cases, this results in the mortgage lender pursuing the co-signer, rather than the borrower, for any remaining deficiency after foreclosure.
If you do not make arrangements with the primary borrower’s mortgage company to pay off his mortgage deficiency, the lender can sue you for the balance. After winning a civil judgment against you in court, the lender reserves the right to seize your bank accounts, garnish your wages or place liens against any property that you own. In addition, the mortgage lender’s judgment appears on your credit report alongside the foreclosure – lowering your credit rating even further.