If a loved one seeking to purchase a house can't obtain approval for a loan on her own, you might be tempted to become a cosigner to help her realize her dreams. While cosigning itself is fairly easy, cosigners take on big responsibilities if the borrower defaults on the loan. Although you might want to help out a friend or family member, think carefully before cosigning, and be sure you can take the financial and credit hit of a potential default before you decide to take the plunge.
Foreclosure
If you're on the title, you're a co-owner of the home and your rights are similar to those of the primary borrower. But these rights won't stop a foreclosure. If a home loan remains in default too long, the lender may begin foreclosure proceedings to sell the home and recoup some of its losses. You won't be able to stop these proceedings unless you pay the full amount owed, and being on the title won't give you any claim on a foreclosed home.
Credit Issues
A cosign on a loan is legally responsible the payments. The loan will appear on your credit report as if it is your own loan. If the borrower defaults, you'll be responsible for the balance, and your credit could take a major hit. Negative items generally stay on your credit report for seven years.
Legal Liability
When lenders lose money on a loan, they'll take whatever steps are necessary to recover the loss. This can include a lawsuit. Because cosigners share the same legal responsibilities as borrowers, the lender could elect to sue you as well as the borrower. You won't be able to defend yourself by claiming it wasn't your loan, and you could end up with a judgment ordering you to pay back all or a portion of the loan.
Financial Instability
Defaulting on a loan can send your financial future into a stressful tailspin. If your credit takes a hit, you could struggle to purchase or refinance your own home, and you might not be able to obtain credit cards or personal loans. Garnishment of wages -- which could cut into your paycheck for years -- is a possibility if you are sued. You might also have to hire an attorney to defend you against a lawsuit, and this can be an expensive move.
