What Are the Penalties for the Co-signer of a Mortgage Loan in Default With the Co-signer on Title?
When a borrower applies for a loan, the lender may request a co-signer if the borrower is unable to qualify on his own. This may occur if the borrower's credit score isn't as high as the lender would like or if the borrower's income alone isn't sufficient to qualify for the amount of the loan. A co-signer on a mortgage loan personally guarantees payment of the mortgage debt. If the mortgage loan enters default, the co-signer may face severe financial penalties.
As co-signer you are responsible for the mortgage in the event of a default by the primary borrower. The mortgage lender will seek to collect payment from you if the primary borrower does not pay the mortgage loan. The lender may contact you and inform you that the loan is delinquent. If you don't bring the mortgage loan current or make arrangements to do so, the lender may pursue stronger collection efforts against you and the primary borrower, including a foreclosure. Since your name is on the title, a foreclosure means both you and the primary borrower will lose ownership interest in the property.
A foreclosure is a legal proceeding whereby the lender takes ownership of the property due to a breach of the mortgage loan agreement. This breach is usually due to lack of payment on the loan. After the property is foreclosed on, the lender will sell the home to recover some of the money owed on the loan. The difference between what the lender gets for the sale of the home and the amount owed on the loan is called a deficiency. Depending on the laws of your state, you may or may not be responsible for this amount.
A recourse state is one that permits a lender to sue a borrower for a mortgage loan deficiency. The lender can sue the primary borrower but it can also sue you as the co-signer since you agreed to accept personal responsibility for payment of the loan debt. If the lender obtains a judgment against you, he may be able to seize money in your bank accounts, garnish a portion of your wages or place a lien on property that you own. The lender can pursue your assets, the assets of the primary borrower or both. In a nonrecourse state, the lender cannot sue you or the primary borrower for the deficiency amount. The lender will instead write that amount off as a loss.
A default on a mortgage loan will appear on your credit report and that of the primary borrower. Late payments remain on a credit report for up to seven years. If the home is foreclosed on, the foreclosure will also appear on the report for up to seven years. Such negative data can damage your credit score. A foreclosure can lower your FICO credit score anywhere from 85 to 160 points, according to FICO. Also, one single 30-day late payment can drop your FICO credit score by 60 to 110 points.
Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.