Question of the week: What is my liability as co-signer?
Answer: This week’s question is a continuation of last week’s question of the week (Can we put our college student on a mortgage?).
The short answer is, if you are a signer on a mortgage your are 100% responsible for 100% of the mortgage.
With rates higher than they were several months ago, many families are finding that they are just missing on being able to qualify for the homes they want to purchase. One solution for many is to add a co-signer to the mortgage.
When we are adding a co-signer, be it a parent, child, sibling, or other individual, I am asked the question, “what is my liability?”
When a lender approves and application package, they do not approve with 100% of the liability for re-payment for the “primary” applicants (those who are occupying the home) and a lower liability for any co-signer. They are approving and funding the mortgage with all individuals on the mortgage having equal responsibility and liability.
Co-liability is not just a factor for a family needing an income boost to qualify for their home, it is also a factor when couples purchase a home together, whether they are legally married or not.
When you purchase a home there are two legal documents that are recorded. The Grant Deed, which transfers ownership for the current owner to you. And, in California and most other states, a Deed of Trust is recorded, which is the document that creates the lien for your mortgage loan—i.e., the instrument by which a lender can foreclose if you default on your payments.
Someone can be on the deed, the ownership document, without being on the mortgage; in other words, they have ownership interest without having loan liability. However, lenders will not let someone be on the mortgage without having ownership.
Here is a scenario where we have a married couple with one spouse not on the mortgage, on the property, and we have a co-signer.
Christina and Adrian want to purchase a $750,000 home with 10% down. Their income and funds to close qualify them for the home, however Adrian’s credit score is very low due to fall-out from a divorce several years ago. Christina’s father, George, is willing to co-sign.
“You can’t co-sign credit,” is a axiom of lending. Interest rates and program qualifying are based on the lowest middle credit score of all borrowers. Because of this we work up the numbers by removing Adrian from the application and adding George.
Working up the income, debts, and funds for closing with both Christina and George we qualify for the mortgage. For debts, we count all obligations that are just Christina’s and just George’s, as well as all joint debt that Christina and Adrian have, as well as George and Patty, Christina’s step-mother. Not included are any obligations that are just Adrian’s and Patty’s.
With Adrian’s poor credit score removed, we are eligible for a lower interest rate, and lower mortgage insurance premium. We obtain loan approval and fund the loan with Christina and George on the mortgage, and both of them plus Adrian on the deed as owners of the property.
At closing the following deeds are recorded in this order:
- Quick Claim Deed transferring the property from current owner to Christina and Adrian as husband and wife, George as married owning as sole and separate property, all as joint tenants.
- Quick Claim Deed from Patty in which she declares she quits any claim on the property she would otherwise have as California is a community property state.
- A Deed of Trust securing the property as collateral for the mortgage with Christina and George as the responsible parties.
Christina and Adrian move into the property. About three years later Christina recognizes that Adrian’s prior divorce and very bad credit were not as little his fault as he always led her to believe. They separate, Adrian moves out and quits contributing to the mortgage payment. Christina lets George know what is happening, and that she is unable to make the payment by herself.
George has a few options. If he chooses not to assist with the mortgage payment then the loan will go into default. This will adversely affect he and Christina, but not Adrian or Patty. Or he can assist with payments, retain good credit standing, with the understanding that any funds he pays to the mortgage will be reimbursed after the home is sold due to the divorce.
Because Christina, George, and Adrian are on the deed as equal owners, for any sale or transfer to go through all parties need to agree, or there must be a court order to force any recalcitrant party to sign any documents to transfer the property.
Depending on Adrian’s cooperation with the divorce filing and settlement, and subsequent transfer of the home and division of equity, either to an outside buyer or to Christina, or Christina and George, this issue can drag out for a prolonged period of time, increasing the funds George must contribute to keep the mortgage current.
In this case, we did a cashout refinance with Christina and George on the loan and title as owners, and extracted some equity to payout Adrian for the divorce settlement. Because of his history of not paying his obligations, we worked with the attorney to create a settlement that was much more in favor of Christina with the division of assets and eliminated spousal support payments she would likely have been due. Thankfully, Christina and Adrian did not have any children together. From separation to final settlement and removing Adrian from the property, a little over one year passed.
Co-signing complications come up more frequently for non-married couples than married couples as they are more likely to separate and go their separate ways. Without some of the legal protections for separation of assets and obligations of married couples, the situations of separation with join ownership of property can be a bit more complicated if one, or both, of the partners choose to make it so.
Co-signing for a home, car payment, college loans, or any credit obligation, is no different than being the only signer on the obligation—you are 100% responsible for all payments whether you receive any benefits from the debt or not. Before co-signing for a debt for which you will be receiving no direct benefits, make sure you are fully aware of the risk and possible exit strategies available.
Finally, if you do co-sign, that obligation is reported on your credit report as if you are the “primary” borrower. The amount of the outstanding debt, the monthly obligation, and very importantly the payment history, impact your credit scores and ability to qualify for other loans and credit.
To close, if you have co-signed for someone to purchase a home, or car, standard mortgage underwriting guidelines are that if you can show that the other party(s) on the obligation have made the last twelve payments in a timely fashion, the obligation’s payment will not count against you for qualifying.
If you, or someone you know, is trying to purchase a home please contact me to go through options and scenarios.
Have a question? Ask me!
Surprise!! Last week we have surprise with the jobs report for July showing a lot more jobs created than expected, more than twice as many. This week the economic surprise was that the Consumer Price Index was flat in July—no increase in prices from June. This resulted in the annual rate of inflation decreasing from 9.1% in June to 8.5% in July.
As you have likely noticed, gasoline prices dropped in July, down 7.7%, which was the primary reason for overall prices remaining flat for the month. Keeping the overall rate to be negative was the 1.1% increase in foods prices in July from June, and are up 10.9% from July 2021.
Rates for Friday August 12, 2022: Investors liked the CPI data as it possibly portends inflation peaking and perhaps starting to drop. If this is the case there is less pressure on the Fed to continue to increase interest rates. Last week’s news supported higher rates faster, this week’s news supports rates stabilizing or dipping. When in conflict, rates usually go up, or remain very sticky going down. This week we have the latter.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30-year conforming 4.875% Flat
30-year high-balance conforming 5.50% Down 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
Following up on last week’s WR&MU, and this week’s question of the week, this morning a lot of stress and anxiety was relieved when we were notified that we have been approved, along with another family, for an apartment in Manhattan for a twelve-month lease. It is a four-bedroom apartment, with four young ladies moving in. The other family going through qualifying is that of one of our daughter’s good friends from high school who is attending a different college in the city. Her mother and myself are the co-guarantors for the lease. Which as you learned above, each of us is individually guaranteeing that if one, or all, of the tenants do not pay, we must. #Parenthood
Further following up on last week’s WR&MU question of the week, even with our share of the rent through the full twelve months as opposed to paying for a dorm room for eight months, we are saving over $4000 in housing costs.
Have a great week,
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog