What Happens When You Cosign for a Mortgage?

Lenders assess a borrower’s financial profile, including credit history, income, and debt. If a prospective homeowner struggles to meet these criteria, a lender may require a cosigner for the mortgage application. This strengthens the borrower’s application by providing additional assurance to the lender.

Cosigning for a mortgage is a significant financial commitment, as the cosigner assumes responsibility for the loan. This article outlines the nature of cosigning, its impact on financial health, consequences of payment defaults, and avenues for releasing liability.

Understanding Cosigning for a Mortgage

Cosigning a mortgage means legally agreeing to take on financial responsibility for the primary borrower’s loan. As a cosigner, you become equally liable for the debt, committing to repay the mortgage if the primary borrower cannot meet their obligations. Lenders can pursue the cosigner for payments, even if the cosigner does not reside in the home or directly benefit from the property.

Lenders typically require a cosigner when the primary applicant’s financial standing, such as credit history or income, is insufficient to qualify for the mortgage independently. The cosigner’s income, credit history, and financial resources strengthen the loan application, helping the primary borrower secure the loan or obtain more favorable terms.

Cosigning is a legally binding contract. From a lending perspective, there is little practical distinction between a cosigner and a co-borrower, as both share equal responsibility for loan repayment. However, a key difference is that a cosigner typically does not hold an ownership interest in the property’s title, unlike a co-borrower.

Impact on Your Financial Standing

Cosigning a mortgage directly impacts your personal financial profile. The full mortgage loan amount appears on your credit report as your own debt, regardless of whether the primary borrower makes consistent payments.

This debt significantly influences your debt-to-income (DTI) ratio. Lenders calculate DTI by comparing your total monthly debt payments to your gross monthly income; a higher DTI signals increased financial risk. Consequently, a cosigned mortgage on your credit report can make it more difficult to qualify for other loans, such as a car loan or your own primary mortgage.

The primary borrower’s payment history on the cosigned mortgage directly reflects on your credit report. Timely payments can positively contribute to your credit score. Conversely, any missed or late payments by the primary borrower will negatively impact your credit score, just as if you had missed the payments yourself.

What Happens If Payments Are Missed

If the primary borrower fails to make mortgage payments, the lender will pursue the cosigner for outstanding amounts. The cosigner is legally obligated to cover these payments to prevent further financial and credit repercussions.

Consequences for the cosigner include late fees and a significant negative impact on their credit score. Missed or late payments are reported to credit bureaus, remaining on the credit report for up to seven years. Such delinquencies can substantially lower the cosigner’s score.

Lenders will initiate collection efforts, contacting the cosigner directly for payment. If payments remain unmade, the lender may pursue legal action against both the primary borrower and the cosigner. This could result in lawsuits, judgments, wage garnishments, or seizure of assets to satisfy the debt.

In cases of default, the property securing the mortgage may enter foreclosure. A foreclosure on the cosigned account will appear on the cosigner’s credit report, causing severe and long-lasting credit damage. The cosigner could also be held liable for any losses if the foreclosure sale proceeds do not cover the full outstanding loan balance.

Releasing Cosigner Liability

Removing cosigner liability from a mortgage agreement is generally a difficult process, as lenders are reluctant to release a party who provides additional security. The most common method to remove a cosigner is for the primary borrower to refinance the mortgage. This involves applying for a new loan solely in their name, based on improved financial standing and creditworthiness.

For a successful refinance, the primary borrower must demonstrate sufficient income, a strong credit score, and a manageable debt-to-income ratio to qualify independently. Once the new loan is approved and the original mortgage is paid off, the cosigner’s obligation is terminated. Refinancing typically incurs closing costs, ranging from 2% to 5% of the new mortgage amount.

Another scenario for releasing liability is the sale of the property. If the home is sold, proceeds pay off the mortgage in full, eliminating the debt and the cosigner’s obligation. While some mortgage agreements may include a “cosigner release” clause, these are rare and usually require the primary borrower to meet specific conditions, such as on-time payments.

A cosigner should anticipate that their liability will persist for the loan’s duration unless the primary borrower’s financial situation significantly improves, making them a strong standalone candidate, or the original debt is completely satisfied.