What Are the Responsibilities of a Co-Signer in a Mortgage Foreclosure?

Co-signers' responsibilities equal homeowners' responsibilities in forclosures.

Loan co-signers occupy an important and, sometimes, unusual position in borrowing transactions. Foreclosure damages co-signer credit scores just as badly as the borrower's. Before agreeing to co-sign a mortgage loan, people should understand their responsibilities and plan to monitor the borrower closely.

Co-Signors Versus Guarantors

Confusion regarding responsibilities often exists when considering the duties of co-signers and guarantors of loans. The difference is significant. Guarantors have few responsibilities unless or until a loan becomes delinquent. Only then are they responsible to correct the delinquency and are their assets at risk. Conversely, co-signers are responsible for repayment from the loan inception, with liability equal to the borrower.

Co-Signor Credit Mirrors Borrower's Credit

Unlike guarantors, co-signers are responsible for every monthly payment, made or missed, and the total outstanding balance. A foreclosure of the homeowner will show on a co-signer's credit report just as it is recorded in the borrower's file. All co-signer assets are at risk, just as if they were the primary borrower and homeowner.

Homeowner's Bankruptcy Filing Does Not Protect Co-Signers

When facing foreclosure, homeowners often file for bankruptcy protection to prohibit any further collection activities by the mortgage lender. This action is common and typically effective, particularly in the short term. However, a homeowner's bankruptcy petition offers no such protection to co-signers. As "equal makers" to the mortgage loan, co-signers have no bankruptcy protection against lenders trying to collect monies due. Equally important, a co-signer's assets become more vulnerable to seizure since the homeowner's assets are protected by the bankruptcy filing.

Future Credit Jeopardized

After a foreclosure, a co-signer's credit is damaged. Lenders see the public record action identically to the homeowner's credit report entry. Future prospective lenders have no way of knowing the applicant was not the homeowner but merely a co-signer. Unless given the opportunity to explain and prove their position, co-signers involved in foreclosures will typically receive loan denials for some years after the problem is recorded.

Co-Signor Considerations

All those asked to co-sign a loan should carefully consider the request. The responsibilities of co-signers, particularly with mortgage loans, far outweigh the potential benefits. Co-signers can achieve positive credit report results if the borrower makes all payments on time and as agreed. This good news is reported just as judiciously as any negative results. However, even in this situation, co-signers applying for their own mortgage may encounter debt-to-income problems, since the entire mortgage payment is calculated into their own housing and debt ratio.

References

• Foreclosures and Co-Signor's Effects
• How Foreclosures Affect Co-Signors
• Risks for Mortgage Co-Signers

Resources

• How to Protect a Co-Signer in a Foreclosure