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.
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?