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Dear D. B.:

Someone, who co-signs a loan to purchase a home, faces the risk of jeopardizing the co-signer’s credit reputation and the co-signer’s own ability to secure a loan at the lowest cost. Also, under some circumstances, a co-signer could be held personally responsible for repayment of the outstanding loan amount.

As a co-signor, your credit rating, and therefore your ability to borrow money or obtain credit for other purposes may be affected by becoming a co-debtor for your son and daughter-in-law’s loan. This is true even if an actual “default” never occurs.

You, also, should be aware that a lender will generally require a co-signor to be placed on title as an actual co-owner of the property. This can pose problems for you, such as exposing you for liability for personal injuries or property damages, which are attributed in some way to the maintenance, control or ownership of the property (of course, sufficient homeowner’s insurance coverage can help insulate the owners in such situations).

Where it is anticipated that the co-signor will be placed on title, as a co-owner of the property, steps should be taken to structure the loan agreement, so that if there is a subsequent removal of the co-signor’s name from the title, there will be no acceleration of balance of the loan, which can otherwise occur pursuant to a "due on sale" clause (which is included in most loan agreements).

In the event that you do decide to co-sign for your son and daughter-in-law’s home loan, your contractual responsibility to the lender and the negative impact to your credit will continue until the entire loan balance is repaid. The mere removal of your names from title will not remove your names from the loan, unless your son and daughter-in-law are able to qualify to refinance the original loan in their names alone.

In your situation, you may not be obliged to pay the unpaid balance of the loan, if there were a default. This is because the purpose of the loan is to purchase a home as a primary residence. Such a loan is protected by the California “anti-deficiency” laws, which applies to loans secured by, and entered into in order to buy purchaser-occupied residential property of four units or less.

When a loan falls under the “anti-deficiency “ legislation, the law limits the amount a secured creditor may recover upon default of the loan terms to no more than the proceeds from a foreclosure sale of the secured property. This is true even when the sale proceeds are not enough to fully pay the balance of the loan. In other words, lenders of purchase money loans, generally, are barred from pursuing the borrowers (including any co-signors) for any balance left owing on the loan, after foreclosure (the “deficiency”).

Each real estate problem usually has its own distinct circumstances, and frequently is more complicated than realized by a layperson. Readers are also encouraged to consult with their own lawyers to obtain guidance concerning their problems when they first arise.

Readers are cautioned that these answers are not intended to be the basis for any action or reliance by the reader.
You are welcome to visit our web site at “www.dumanlaw.com”.

Those Who Co-sign for a Home Loan Will Have Their Credit Impacted by the Loan, Even If a Default of the Loan Never Occurs