Co-signing a mortgage, for both married and unmarried people, creates a risk to both signers. Married couples have built-in matrimonial safeguards under the law, including sharing property purchased during the term of the marriage. An unmarried man or woman co-signing on a mortgage for a house shared with another person faces the hazard of holding a mortgage on something shared, but not easily divided between the two if they go separate ways.
A mortgage co-signer assumes the same responsibilities for paying the loan as the original mortgage signer, according to the Federal Trade Commission. If the original mortgage signer defaults on monthly payments, you are promising to make the payments. The federal government understands the risks and requires your lender to ask you to sign a statement that the lender gave you fair warning of the possible hazards in co-signing for a loan.
Unmarried mortgage co-signers face all types of potential lifestyle changes. Your co-signer might get married, leaving you holding a mortgage for the house or asking you to come up with cash for the partner's part of the home equity to buy out the loan. Your co-signer could simply move out or transfer as a result of a new job assignment, also leaving you holding the loan bag. These scenarios mean you must pay cash to buy out your co-signer, but the loan partner might want to keep the house and throw you out. This presents a problem when the partner doesn't have the cash upfront and wants you to move with the promise of an equity payout -- at some future date. That leaves you without any cash to move. You also still show as a co-signer on the original mortgage and that restricts your credit qualifications for buying a new property, as well as reduces your credit for applying for new credit cards or an auto loan.
Co-signing a mortgage also sets up the foundation for disaster if the original mortgage signer fails to follow through with payments or files for bankruptcy. If you don't have enough income or cash on hand to make the mortgage payments, the lender can come after you in court for payments, perhaps garnishing your paycheck. If the property goes to foreclosure, your credit record could be damaged for years. Other possible hazards include a partner borrowing on the equity in the house for a second mortgage or for a construction loan for work on the house -- both without your knowledge or consent.
One alternative to the usual mortgage with two unmarried co-signers is to have one person sign the mortgage agreement using the other person as an income source. This provides the borrower with regular monthly income to qualify for the loan. The downside to this arrangement is that such rent payments qualify as income on federal and state taxes for the loan signer. It also precludes the renter from taking a federal or state tax write-off on the mortgage interest.
- State of Michigan Attorney General: Cosigning a Loan? Know the Risks!
- Indiana Legal Services, Inc.: Co-Signing A Loan
- Experian National Score Index: What Would Cosigning Mean for You?
- Federal Trade Commission: Facts for Consumers -- Co-signing a Loan
- Wells Fargo: What Lenders Consider
- Bankrate.com: The Basics of Co-Signing a Loan
- IRS: Publication 936 -- Home Mortgage Interest Deduction
- IRS: Rental Income and Expenses
- IN.gov: Understanding a Mechanic's Lien
- New York Times: Your Home; Holding a House Hostage
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