Co-Signing a Mortgage, Is It Always a Good Idea?
So a friend or family member has asked you to co-sign a mortgage. He or she promises that the loan payments will always be made on time, and you will never have to worry about the prospect of default. You want to help out, so you agree. However, you should be fully aware of the risks of co-signing a mortgage before you sign those papers. You have to think of co-signing a mortgage as the same thing as taking out a mortgage yourself, as you bear the same financial responsibilities and risks. In this post, we’ll tell you more about the obligations that come with co-signing to help you decide if it’s a good idea for you.
What Co-Signing Means
Co-signing a loan puts you under the same contractual obligations that you would have if you signed the loan yourself. And, more than likely, you will be called upon to repay the loan. In fact, as many as three out of every four co-signers end up having to repay the loan. Here is what co-signing means for you:
- You are guaranteeing the debt. This means that if the borrower doesn’t repay the debt, you will have to. Make sure you could afford to repay the loan in case it comes to that.
- You could be responsible for up to the full loan amount. You might also have to pay late fees or penalties and collection costs.
- Some states allow the creditor to collect the debt from you without trying to collect from the borrower first. All of the collection methods that can be used on the borrower may also be used on you.
- Your co-signer notice is not the contract the obligates you to pay the debt.
Is Co-Signing Ever a Good Idea?
Clearly, co-signing has its share of risks, but there are times when it might be appropriate. For instance, parents might co-sign on a child’s mortgage to help him or her establish credit. If you do decide to co-sign, here are some tips on how to protect yourself:
- Don’t co-sign unless you can afford to pay the loan. If you and the borrower fail to pay the loan, you could be sued or have your wages garnished.
- Even if the borrower doesn’t default, having the loan could keep you from getting other credit because it will count toward your total debt amount and might have a negative impact on your credit score.
- Don’t offer your property as collateral if possible. If the borrower defaults, you will lose whatever property you offered against the loan.
- Tell your lender you want to be notified in writing if the borrower misses a payment.
- Obtain copies of all important documents, such as the loan contract, warranties, and the Truth in Lending Disclosure Statement. If you have a dispute with the lender, you will need these papers. Remember that the lender is not obligated to give you these documents, so you might have to ask the borrower for copies.