How, um. iron-clad is co-signing a mortgage?

Factual Questions
1

Just looking for info, and I have the feeling that SOMEONE here knows about EVERYTHING.

Brief summary: a youngish couple, she’s mid 20s, he’s just about 30, married about two years, no children, though she says they plan to have some ‘soon-ish.’ Both have full-time jobs, but she’s on the very bottom rung, he’s a bit further along, and he makes at least somewhat more than her. They don’t seem in any financial stress though they’re not rich or even close. They live in an apartment but she says they want to buy a house with a backyard, etc, in “a couple of years.” From the way she’s spoken, this is VERY important to her – she grew up in a financially unstable house.

(BTW, I’ve never met him. She and I volunteer at the same charity, so all info filtered through her.)

He has a somewhat older brother (married, two toddler aged kids) and they’ve been house hunting. Apparently they’ve found the perfect house but he can’t get the mortgage amount he needs on his own (vague mention of some problem with a car loan a few years ago) and he’s now approached younger brother(YB) to cosign for him.

YB is all “of course I will,” His family is one of those with ‘Family always helps each other no matter what’ as their motto. My friend was a lot less enthusiastic about it. Not one thing in specific, but she’s worried about the future impact on their joint lives if something interferes with OlderBrother keeping up the payments.

YB pooh-poohs this. He says he can always remove himself as co-signer if a problem comes up. (I don’t know, never had or cosigned anything, but would the bank just casually shrug and let the backup protection just walk away? Seems strange.)

Also, even if the brother is making the payments okay, if the younger couple moves on to buying their own house, won’t his having this other potential debt make it harder to get their own mortgage approved?

And, not that it came up with her directly, does she have any say in the matter if they end up disagreeing over the co-signing? Can her husband sign by himself, or does a married couple both have to agree and sign? Because, really, it could have a major impact on her life if bad things happen.

I don’t plan to ‘lay down the law’ to her or anything, but if there are true liabilities about this, I’d drop hints about her and her husband needing to look into the legal liabilities before proceeding.

2

You don’t say where these people are located, or where the property in question is located, and location determines the jurisdiction which determines the legal details.

However - when you co-sign a loan you are agreeing that if the primary person signing that loan can not make payments YOU will make those payments. To the best of my knowledge (and the last time I had a co-signer was on a lease over 40 years ago, when I was living in a state where I wasn’t quite old enough to legally sign a lease on my own) no, you can’t just skip out or remove yourself from the contract.

Because that’s what it is. Co-signing is signing a contract where you agree to make the payments if the original person can’t or won’t.

Yes, it can definitely mess you up financially.

For anything else I’d recommend consulting an actual lawyer.

3

Not unless you can convince the other person to refi it on their own and the bank is willing to give the individual a mortgage without a cosigner. You can’t just remove yourself from a mortgage. The entire point of a cosigner is someone that will be responsible for the loan if the other person doesn’t make the payments.
Having said that, it’s very possible that once the loan starts getting chipped away at and they’ve been making on-time payments and keeping the credit score up, the bank might then be willing to do it. If this person cosigns, I could see a condition of that being that the primary signer has to make a good faith effort to move the loan entirely into their own name.

If someone really wants to help them, I think they’d be better off lending them the money out of pocket and coming up with a repayment agreement. That way if the primary signer defaults, the bank isn’t coming after the cosinger for the rest of the mortgage.
That could even mean the ‘cosigner’ getting their own personal loan and coming to an agreement with the other person. Then if the new homeowner defaults, the ‘cosigner’ isn’t at risk of losing their house, so long as they can make the remainder of the payments on the loan in their name.

TLDR, I wouldn’t even consider cosigning on a mortgage for someone that can’t get their own unless they were family and I knew they (or at least I) had the means to cover the loan.

That depends on your state. In Wisconsin a spouse is required to cosign on loans. So they’d probably be roped into this as well.

4

In a home loan there is a debt (the promissory note) and security for the debt (a mortgage)

What you are describing is co-signing the promissory note. That’s agreeing to pay the debt if the primary borrower defaults.

Co-signing the mortgage doesn’t obligate you for the debt. But it does mean that you agree to the covenants of the mortgage; namely, that the bank can have the home sold to repay their loan if the loan goes into default.

(This becomes necessary if the person co-signing the mortgage has some interest in the property, perhaps as a spouse or successor in interest of the borrower)

5

Really? That doesn’t sound right. If the cosigner has no fiscal responsibility, why does the bank need one?
Are you saying that if I cosign on a loan and the person defaults on it, the worst thing that can happen to me is that I’ll have a black mark on my credit report for a few years?

I’ve always been under the impression that the bank would likely sue me before they’d foreclose on the house.

6

Again, there is a distinction between the mortgage and the note.

No.

The loan is reflected by a note. That’s an I.O.U.

If you co-sign that, you are promising to see that it gets paid.

But not everybody who signs the mortgage is on the loan.

7

Is that a distinction relevant to this question then? I don’t know the difference between a mortgage and a loan (though I see there IS a difference), but I’ve never heard of someone ‘cosigning a mortgage’ to mean anything other than being named on the loan documents and promising to pay the bank back if the primary person doesn’t.

A co-signer is someone who agrees to take on the financial responsibility of the primary borrower’s loan if they can no longer make payments

If they stop making payments, the responsibility will be passed on to you—and you could be sued if you don’t follow through.

It’s a cold, hard reality that if the primary borrower fails to make timely monthly mortgage payments or defaults on the loan, the responsibility for this debt will fall on the cosigner. This could lead to financial strain, credit score damage, and even potential legal action as the lender attempts to collect the outstanding debt.

8

I think I already explained why what the OP wrote is not about signing the mortgage (as the title reads), but the note.

It doesn’t need to detail the thread. It’s just a point of clarification.

Oh, and OP:
If you sign the note you are on the hook for the payments.. I’d tell your friend not to let her man do that, as his credit is at risk, and debt collectors could come looking for him (but she’s not on the hook for any debt that she didn’t personally agree to)

9

Yes, of course that matter, stupid of me.

Well, the bank they’re talking to is Bank of America, and the branch is physically located in Massachusetts, but I don’t know if it’s ‘legally located’ somewhere else. The house is in Massachusetts, specifically in Middlesex County, if that matters at all.

I have no idea at all about the distinction between signing the mortgage and signing a note. Doubt if my friend does, either.

Basically, it does seem to me that speaking to a lawyer first should be mandatory. And one they find on their own, not just whoever OlderBrother is using already, just in case of conflicts. In this area, even a dog house could cost hundreds of millions of dollars. For that money, getting really good advicce should surely be worth the cost of a consultation.

10

I have signed three time to help relatives obtain financing:

  1. My brother’s dog was seriously injured and he had to borrow money to pay the vet. I co-signed for the loan (which was actually a credit card through the vet’s office). The credit card definitely shows up on my credit report (but has no impact that I can tell). I made it crystal clear that if he was going to be late on a payment that he needed to tell me with enough time that I could make the payment to avoid a credit score ding. He never made a late payment so that wasn’t an issue.

  2. I co-signed my son’s first apartment lease since he had no credit history. I did not have to co-sign when he renewed since ha had paid on time for a year.

  3. My brother took out a home equity loan (mortgage) on his half of a property that I co-own (inherited from our parents). I had to sign a document giving permission for the lien, but no responsibility for the loan itself. The loan does not show on my credit report. If the lender forecloses I will be notified and I can either bring the loan current or let them foreclose and accept half of what they get from the foreclosure sale. My credit rating is not at risk.

11

This is what I was referencing. Sometimes people sign documents but have no financial responsibility. But it’s usually because they have some pre-existing interest in the property.

12

YB can’t just back out from being a co-signer. The way for YB to take himself off the mortgage is for OB to refinance the mortgage without YB on it. If OB doesn’t refinance, then YB will stay on as a cosigner. He’ll be on the hook if OB can’t make the payments. And this would have me very worried:

:triangular_flag:
A “problem with a car loan” very likely means he missed payments or paid late. If that happened with his car loan, then I’d be worried about it happening with the mortgage as well.

As for YB buying his own house, he should talk to someone at his own bank (without OB around) about how being a co-signer on OB’s mortgage will affect his credit rating. I would expect that it would factor in somehow for his ability to get a mortgage. So even if OB never defaults, it could be that co-signing would mean YB couldn’t get a mortgage of his own. YB could use this as an excuse for not being a co-signer.

Also, one other thing to realize is that it’s irresponsible for OB to get a house that he can’t qualify on his own. He needs to stop looking for “the perfect house” and instead find a suitable place to live that they can afford and meets the family’s needs. Once they get to a point in their life that they are flush with cash, then they can be picky about getting the perfect house. But for now, they should get a regular house, build up equity, and get the perfect house later when they are on more solid financial ground. This kind of attitude of OB wanting to have the perfect house even if he can’t afford is another reason for YB to carefully weigh whether he should co-sign it. That kind of attitude probably means OB also gets “the perfect car” (that he can’t afford), goes on “the perfect vacation” (that he can’t afford), etc. If OB wants to do that on his own, that’s fine, but he shouldn’t have YB co-signing the loans to finance that lifestyle.

13

How does the old joke go? “I have an agreement with the bank - they don’t invite you over for beers, and I don’t lend you money.” Basically, if the bank won’t let OB have a mortgage, they are for some reason hesitant to allow him to carry a debt. Why should YB take on more risk than the bank?

AFAIK, no you cannot get out of being cosigner - as mentioned, only 2 ways: either the bank (or a bank) allows OB to refinance, later, without a co-signer; or the mortgage gets paid off. Otherwise, YB is on the hook. YB promises he will pay if OB does not. Why would anyone let you drop that obligation while money is still owing?

I would be very concerned if OB was the one who assured YB that he could withdraw from co-signing at any time, or how he described it. That sounds more like OB is trying to pull a fast one to con YB into signing. If he’s that kind of guy, why sign for him?

I agree, a guy carrying a full morgage even as a cosigner is a much higher risk for the bank, and may affect the ability to get a mortgage themselves.

Also, ask yourself how OB got the bad credit. Whatever, missing car payments becomes like missing mortgage payments. The question then becomes, what happens if OB misses payments? How many months behind before the bank starts going after YB too? Would you wake up one morning to find that the bank is asking you for 6 months of mortgage payments? There goes any down paymnet you were saving, and any grocery money for the next few months until the house either is sold or repossessed/foreclosed and sold. At least, house prices aren’t going down (yet). Is Massachusetts a state where if the foreclosure sale amount does not cover the debt, the signer and co-signer are jointly on the hook for the difference? (And if OB in a fit decides to trash the house to spite the bank, guess who pays for the shortfall on sale?)

And then, what are the odds OB will pay you back? And how soon? (The only worse thing than money fights among family is inheritance fights.) One scenario is you go broke, and OB never talks to you again (or vice versa).

There’s a whole industry devoted to deciding who is a good risk financially, and how much, and then expediting the loan/mortgage. Let them do thier job and believe what they say.

Then there’s the debt risk. Are both spouses equally liable for a debt one signed for in that state? (IIRC, in California they are if not separated at the time.) So even if co-worker divorced YB the bank could still come after her? Even if not divorced, if she was working and YB unemployed, could they try to go after her bank account and paycheque?

Advice columns are full of stories about parents who co-signed for loans, and came to regret it. Or worse, a person who cosigned for a now ex-boyfriend or ex-girlfriend. Even if you stopped dating two years ago, you’re still on the hook for their missed car payments.

14

If he co-signs a loan he might want to be named on
the deed as well to retain some stake in the property.
,

15

When I divorced my first wife, she asked me to cosign for a credit card. She assured me that despite her previous financial shenanigans, she would scrupulously pay this card on time. My lawyer strongly advised me against doing this, but I just wanted the process to be done, and didn’t want any additional strife that might cause her to delay the process.

I should have listened to my lawyer. Within a year, my ex-wife told me that she had maxed out the credit card and would no longer be making payments on it. She didn’t care about the consequences, and it was up to me what I wanted to do. Knowing her history, I don’t know why I was surprised by this. Of course I paid it off. As a cosigner, there’s no way I could have just told the bank that I changed my mind and didn’t want to be a cosigner any more.

16

It seems to me that if YB cosigns a mortgage of $500,000, then if YB wants to apply for his own $500,000 mortgage, the bank would want to see income enough for a $1,000,000 mortgage. But that’s just a guess, and this is FQ.

17

That’s absolutely going to be an issue - when YB wants to apply for his own loan to buy a house , the bank is going consider the loan he co-signed in the same way they would look at the loan if he was a joint borrower. Which means the $500K debt will be considered just as if it was the YB’s loan.

And if YB is just a co-signer, not a joint purchaser , he could conceivably end up paying a part of the mortgage and getting nothing when the house is sold. Sure, everything could work out fine, but YB could end up paying the mortgage for a year to protect his credit rating and then get nothing when thehouse is eventually sold.

18

If OB’s house is in Massachusetts, but if YB is in a different state, then the laws of that state will likely come into play. Since you’re in the same state as YB, one thing you could do is go into your own bank and ask them about this situation. Will YB’s credit and ability to apply for his own mortgage be affected if he cosigns the loan in MA? Does YB’s wife need to agree for YB to be a co-signer? A bank in your state should be able to give definitive answers to these questions.

19

Especially considering that most of what gets paid in the early years is interest on the loan, not principal.

20

It used to be much, much, much worse than that, back when I was in the finance industry.

Once you’ve cosigned on a debt, you are up for all debts to that bank, forever, until all debts are paid off.

I don’t know it they’ve legislated that out of existence for real-estate loans in the USA, or in Massachusetts.

They way it worked was a combination of existing law and bank practice. The bank was obligated by both to consider the debters total debt position and identity, and by simple fiduciary practice to always pay down unsecured loans before secured loans.

And the existence of back-up security meant that they had no reason not to grant further loans.

So it worked like this: you co-sign a home loan. Your other borrows more money. Anything you pay off goes to pay off the other loans first: they can keep borrowing more money, you can never pay off the home loan.

Solution: if you want to lend money to YB, lend money to YB. Take out a second mortgage on the home. (That is, create a lien on the home.).

If you have to borrow money from the bank to lend money to YB, do that. Borrowing money from the bank is what you are doing anyway when you put your name as a co-signer to a loan.