Home mortgage loans are a big undertaking, and a lot of money is at stake. Sometimes a potential home buyer doesn't have good enough credit (or sufficient credit at all) to obtain a mortgage loan on his own. If a borrower isn't creditworthy enough, the bank may still provide the loan if there's a co-signer. A co-signer on a mortgage does not have to be on the deed.
TL;DR (Too Long; Didn't Read)
When you just co-sign a mortgage, your name doesn’t go on the deed – just the mortgage.
What Is a Deed?
A deed is a written instrument that shows who owns a piece of real estate. When you sell real estate to someone else, you sign a deed transferring your ownership. When you buy real estate, the seller signs a deed transferring ownership to you. Anyone who isn't on the deed as a grantee or buyer is not legally an owner.
Note vs. Mortgage
A home loan actually has two parts: the note and the mortgage. One is a promise to repay the money loaned, and the other is a security interest in the house being purchased.
A promissory note is a document that you sign when you borrow money to buy a house. The note contains the terms of repayment including the interest rate, the number of years, the total amount borrowed and the amount of the monthly payment. A note for the purchase of a house is secured by a separate document, which is the mortgage.
A mortgage is a document that a property owner signs to give a lender an interest in the property. Because home loans are such high-dollar transactions, lenders need extra protection, and the mortgage is what gives it to them. If you don't pay the loan as you're supposed to, the lender can foreclose on the mortgage and try to sell the house to get paid.
Who Signs the Note and Mortgage?
Only the person who is borrowing the money signs the note when a home loan is taken. If more than one person owns the property, however, all the owners must sign the mortgage in most cases, even if they didn't borrow the money.
For example, if you want to buy a house with your brother but you don't want him to owe the money, you can borrow the money by yourself. Only you will be responsible for paying the loan, even though he owns it with you. However, he will have to sign the mortgage if he is also on the deed.
Why Obtain a Co-Signer?
Mortgage lending standards require borrowers to have certain financial ability and also credit scores above a certain number. If a borrower has bad credit or has no credit all, borrowing money to buy a house can be challenging. If the borrower can find someone to co-sign the loan, the bank may be willing to lend despite the poor credit. A co-signer doesn't need to own the property or sign the mortgage document.
Mortgage Co-Signer Responsibility
A co-signer on a home mortgage loan is responsible for the entire balance if the borrower defaults. However, a co-signer does not have to be on the deed to the property and does not have to sign the mortgage; he is simply acting as security in case you don't pay.
Alternatives to Co-signing a Mortgage
Co-signing a mortgage is a risky affair and is not a light decision. The loan will appear on your credit report, and if the borrower stops paying, your credit will suffer. The mortgage lender may be able to sue you for any unpaid balance after foreclosure. Once you co-sign, you stay on the loan until the borrower pays it off, either conventionally by selling the property or by refinancing.
FHA loans, VA loans or loans through hard money lenders are alternatives to having a co-signer.
Rebecca K. McDowell is an attorney focusing on creditor and debtor law. She has a B.A. in English and a J.D.