|
Co-signing for another person can be dangerous
|
Dear Mr. Duman:
My wife and I are thinking about helping our son and his wife buy a home, by co-signing on their home loan.
What are the consequences we might face in the event they default on the loan?
M.E., Berkeley
In deciding whether or not to co-sign for your sonís home loan, keep in mind that you, like your son and daughter-in-law, will be considered "principal obligors", under the terms of the loan agreement, and as such, you may be equally liable for the full amount of the underlying loan amount.
One effect of being treated as a "co-obligor" under the loan is that the co-signorís credit record will generally reflect the loan as a debt of the co-signor, which might affect the ability of a co-signor to borrow other money for other purposes. Further, if your son and daughter-in-law fail to make payments, or make them late, your credit reputation will suffer, since you are a co-obligor. As a result, you may be obliged to personally keep the loan current and out of default to preserve your credit reputation.
Lenders will commonly require co-signors to be placed on title as a
"co-owner" of the property. A co-signor's status as "co-owner" of
the property can also create co-liability for any future damages or injuries
attributable to ownership of the property. Hence, it is important
that you make sure there is sufficient homeowner's insurance coverage (in
type and amount) to adequately insulate you from such liability, and that
you are named on the insurance policy as an "additional insured" so that
you are protected under the policy.
By conveying title to the property to your son and daughter-in-law,
your liability as co-owner of the property may end, but your obligation
under the note is not terminated
Caution must be exercised in deeding your title, since, under certain
circumstances, such action can trigger the lenderís "Due on Sale" clause,
which would result in having the entire unpaid balance of the loan called
immediately due.
Although it will not protect your credit, you may be protected from personal liability for the loan under California's anti-deficiency laws, which applies to "purchase money loans." "Purchase money loans" are loans obtained to purchase owner-occupied homes, consisting of four units or less. When applicable, the anti-deficiency law limits the amount a secured lender may recover from the borrower to the value of the security only, thereby barring the pursuit of the debtor (and co-signors) for unpaid amounts in the event the property sells for less than the balance of the loan at a foreclosure sale.
The various laws affecting the rights and liabilities of co-signors are too numerous and complex to fully address within this single discussion. Therefore, be sure to consult your attorney for guidance before undertaking such a potentially precarious financial obligation.
4\docs\column\cosigner.231
