Why You Should NEVER Cosign a Mortgage

Cosigning a mortgage has been a popular tactic used, particularly for first-time home buyers. It involves a person with a strong financial profile, signing onto a mortgage with another who has a weaker profile, so that the weaker party can get approval for the loan. It happens every day – no big deal, right? Actually, it is a big deal – you should never cosign a mortgage for anyone, not even your children.

Okay, there might be one exception, but we’ll get to that at the end.

Cosigning a mortgage is not what most people think it is

Most people who cosign a mortgage for another party think that it’s something of a casual arrangement that will not negatively affect them in any material way.

Why You Should NEVER Cosign a Mortgage
Why You Should NEVER Cosign a Mortgage

That thinking is completely wrong.

When you cosign a mortgage for another party, you are legally obligated to make good on the loan in the event that the primary borrower defaults. I believe that most people are at least vaguely aware of this connection, but they quickly dismiss it with thoughts of “Junior will never default, so there’s no problem”.

But there’s more that can go wrong when you cosign a mortgage than just default – and the possibility of default itself should never be dismissed lightly either. When you cosign a mortgage, you put yourself into the classic you jump, I jump conundrum (OK, maybe that isn’t a classic saying, but you have to admit that Titanic was a damn good movie, and that saying has a lot of applications in real life).

Let’s look at some examples

The mortgage will be on your credit report at least until it’s paid in full

When you cosign a mortgage for another party, the mortgage will show up on your credit report until it is paid in full. (Actually, it’ll continue to show for another seven years even after it’s paid.) When lenders or employers review your credit report, they’ll see that mortgage. And though the primary borrowers may be making the payments on it, it will still show up as your debt.

That will have implications that will affect both your credit and your financial profile.

For example, if you already have a mortgage on your own home, you will now be showing an additional mortgage on another property. When you go to apply for credit, it’s entirely possible that the lender will consider that mortgage to be part of your monthly debt obligations. As a result, you may be denied a new loan, or charged a higher interest rate as a result of having excess debt levels.

It’s also possible that a potential employer might turn you down for a job under the assumption that you’re carrying too much debt for the salary that they’ll be offering.

A real estate agent and mortgage broker will tell you not to worry about such things, but that’s because they have vested interest in your ignoring them. As Upton Sinclair once famously said, It is difficult to get a man to understand something when his salary depends upon his not understanding it.

Any late payments on the mortgage will be your late payments

This is one of the more unfortunate outcomes when you cosign a mortgage. If the primary borrower is late on any payments, those late payments will show up on your credit report. And yes, it will affect your credit scores. The hit to your credit will be even more severe if there are multiple late payments, or if the delinquencies run into the 60-day or 90-day variety.

Worst of all, you may have no idea this is happening until after the fact. You may not find out that it’s happening until the loan is 60 days past due, and you are issued formal default notice by the mortgage lender.

But it gets worse…

A foreclosure on the mortgage will be a disaster for you

If the primary borrowers default on the loan and the property goes into foreclosure, the foreclosure will be reported on your credit report as your foreclosure.

If you think about it, this makes sense. The entire reason that a mortgage lender grants approval to the loan with you as a cosigner, is so that you will be there as an extra measure of security in the event the primary borrower defaults. In fact, your entire reason for being on the loan in the first place is for this very event.

Credit implications aside, the lender may be able to pursue a deficiency balance claim against you in the event that the sale of the property is insufficient to fully liquidate the mortgage balance. Whether or not this will happen, and how far it will go, will depend on applicable laws in the state where the subject property is located.

Alternatives to cosigning a mortgage

If you agree that cosigning a mortgage is a bad idea, what can you do to help the primary borrowers buy a house without cosigning the mortgage with them?

You might suggest any of the following:

  • That they buy a less expensive house that will not require the need for a cosigner.
  • That they delay buying a house until they are in a strong enough financial position that they don’t need a cosigner.
  • That they might be better off renting rather than owning.
  • Offer to help them pay off some non-housing debt, that will enable them to qualify for the mortgage without needing a cosigner.
  • Offer a gift for the down payment, that will allow them to put down at least 20% of the purchase price of the house – that might eliminate the need for a cosigner entirely.

The last two items will require that you provide direct cash assistance, but that will be preferable to cosigning a mortgage for them. Your liability in the case of a gift is limited to the amount of your gift – no one will come after you later. Meanwhile, your credit profile will be entirely unaffected should they make late payments – or worse.

One exception on cosigning a mortgage

In the title of this post I violated the never say never, never say always rule, and there is an exception in this case as well.

The one time that it might make sense to cosign a mortgage is if you are going to be a co-occupant of the subject property. Think in terms of elderly parents cosigning a mortgage for their children to buy a house, in which the parents will occupy an apartment or suite in the home.

In this case, you as cosigner will also be getting the benefit of shelter from the subject property. You would also be aware of the day-to-day goings-on, and certainly whether or not your children will be in a position to make the monthly payments. And if they can’t, you can step in and make it for them.

If you’re living in the property, you would have a deeper stake in its ownership. That would create just about the only exception that I can think of. Otherwise, do whatever you can to avoid cosigning a mortgage, even if it’s for your children.

I realize that people cosign mortgages all the time. But given what you know now, do you still think it’s a good idea?

( Photo by WordRidden )

10 Responses to Why You Should NEVER Cosign a Mortgage

  1. I would add to your exception to the rule that if they are going to be the co-signer and co-occupant, that you have your name on the deed as well. That way, any foreclosure or other default notices will be sent to you as well. At least then it wouldn’t be a shock when the sheriff arrives to set your furniture on the lawn and escort you from the house.

  2. Hi Kathy – Excellent point! You should never cosign a mortgage without also having an ownerhips stake in the property that secures it. In the mortgage business that’s referred to as a non-occupant coborrower, implying an owner as opposed to simply a guarantor on the note.

  3. Yeah cosigning anything is a bad idea. Have the patience to let your loved ones do things on their own, it will benefit everybody and not ruin relationships.

  4. Hi EL – I agree, relationships are cleaner when they don’t have financial entanglements. Also, we tend to underestimate the importance of taking full responsibility for our lives and actions, that’s the only way we learn and grow. In today’s world parents are always ready to give their kids (even adult kids) some sort of “leg up”, but I’m not sure that’s leading the world to a better place.

  5. I think co singing is a horrible idea. Jobs are unpredictable nowadays. It just takes one health crisis for one party to be not making an income and your savings to run out and then instant default and eviction. Thereby ruining the ability to rent or anything else because of bad credit. In my area condos are 500,000 on average with HOA fees, resulting in a mortgage of 3,000 for 30 years. It would be foolish to cosign unless its two young people under 40 who both make 200,000. An older person like a parent will not logically be able to work forever. And even if they are able to make payments for 10 years, that is barely a dent on 500,000. People just want to keep up with the Jones’ and it is foolish. As someone who saw parents and aunts and uncles struggle with debt their whole lives, it amazes me that people are so dumb.

  6. Hi Jason – My feeling is if you need a cosigner you really can’t afford the house. I realize to some that sounds cold hearted, but it makes sense. If for any reason you can’t make the payments you’re not only hurting your own credit but also your cosigner’s. Plus the cosigner may be forced to make good on the debt the original borrower couldn’t handle. The potential for it to go very wrong is enormous.

  7. What if the adult children have better credit than the parents and the parents are the ones needing help qualifying for a loan?
    My husband and I have a six figure income. My parents income consists of their social security and some natural gas royalties. They cannot qualify for a loan but they can afford to pay the mortgage. Is this a situation where cosigning would be acceptable?

  8. Hi Sarah – Do what you feel led to do, but all the usual caveats on cosigning a mortgage still apply. It may affect your ability to get a loan in the future, and of course any late payments on the loan will show up on your credit reports. But with that said, people cosign mortgages all the time.

  9. I am in a similar situation as Sarah. My mother wants me to cosign for her on a home. I am 27, not married, and haven’t bought my own home yet, still renting. She suggested I cosign with her for a year, until she can refinance the home and take me off the new contract. How likely is it that she can refinance the home after a year and would this let me off the hook from then on? Even if the refinancing idea goes as planned, will this still be detrimental to me when I apply for my own mortgage down the line?

  10. Hi Jessica – It could go either way. If all works out as in intended, you cosign for your mom, she makes all the payments on time, refinances you off the loan in one year, then you’ll have a paid mortgage with a good payment history to pull up your credit sore. If all that goes as planned, you’ll be in better shape then than you are now.

    But let’s look at if it doesn’t work out. The fact that your mom can’t qualify for a mortgage on her own is troubling. There’s no guarantee she’ll be able to refinance it without you one year from now, for all the same reasons she can’t do it now. And if you don’t mind me saying this, if she can’t qualify for a mortgage on her own she shouldn’t be buying a house at all. (That’s the former mortgage guy coming out in me!). If she can’t refinance to get you off the loan, you may not qualify for a mortgage when your turn comes.

    Now here’s the REALLY bad part – if she makes any late payments on the mortgage, your credit will be hurt. And mortgage lates count heavily with your credit score. That will hurt your efforts to qualify for a mortgage, or any other financing for that matter. But it gets even worse. If for any reason mom can’t make the payments, you’ll be required to step in and cover them. And if you can’t the house will go into foreclosure and your credit will be destroyed for years.

    I realize I’m being painfully blunt here, but the very fact you’re raising an issue means you see trouble ahead. Trust your gut and don’t do it. I’ve seen enough of these cosigning arrangements go sour to know that they should be avoided n 90% of the cases.

Leave a reply