Hazards of co-signing a mortgage if unmarried

Co-signing a mortgage at any time is risky, even for a married couple; Co-signing a mortgage for someone other than a spouse, such as a friend or relative, is potentially an even bigger threat to your financial health. If you must co-sign a mortgage, you should look for ways to limit your liability or find ways to help the person obtain the mortgage without exposing yourself to the legal responsibilities of a co-signer.

Sometimes, when a borrower is buying his first home or trying to start over, his personal assets and credit are not strong enough to qualify for a mortgage. If he adds a non-occupant co-borrower to the loan, the co-signer’s information can boost the application and help the borrower to qualify for the new debt. The co-signer, however, needs to be aware that he is now financially liable for the new debt.

Default

When you co-sign a mortgage, you guarantee payment even if the other party dies or goes bankrupt. Thus, if you co-sign the mortgage, you must leave enough room in your budget to assume payments in case the other party defaults. Before you co-sign the promissory note, acknowledge that even the most well-intentioned of people can fall on hard times and have no way to pay off their mortgage.

Credit Rating

Assuming you and the other borrower never miss a payment, a good payment history improves the other borrower’s credit rating and yours too. However, missed payments become a negative item on both credit histories. Even if you never miss a payment, the presence of a mortgage on your credit rating is something that can prevent you from obtaining a loan on your own. Lenders factor in your monthly debt-to-income almost as much as your credit rating, according to Erin Peterson of Bankrate.

Considerations

If the lender requires the borrower find a co-signer, this means the lender who assesses risk for a living determined that the original applicant was too risky for the company. Also, you do not have any rights to the home in case of default unless you have your name on the title. As a co-signer, you probably did not put your name on the title — this is usually reserved for co-borrowers.

Tip

If you still decide to co-sign a mortgage, get the lender to put in writing that he will send a copy of the bill to your home so you can assume payments before the other party defaults. If possible, look for other ways to help the borrower obtain a loan. For example, you can direct him to a good mortgage counsellor or lend him money for a security deposit.