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April 8,
2004
"I co-signed a loan for
my brother-in-law who has since left my sister and has stopped paying the note�The
lender is now after me to pay. How can I get out of this?"
"In a week moment I
agreed to help a friend get a mortgage by co-signing his note. My friend has
always made the payments, but I discovered that his mortgage shows up as debt on
my credit report, and it prevents me from getting a mortgage of my own. How do I
deal with this?"
These letters are typical of many I
receive about co-signing problems. Too often, people co-sign without giving it
much thought.
Once you co-sign a note, there are only
two ways to get off. Either the loan must be repaid in full, by the borrower or
you, or the lender must agree to take you off.
Lenders require a co-signer when they
don't have enough confidence in the borrower. The lender is not going to let a
co-signer off the hook when the borrower stops paying.
The risk of non-payment is why the lender required a co-signer in the first
place!
There is no way for the writer of the
first letter to get off the hook. The lender doesn't care that the borrower left
the co-signer's sister. The lender just wants to be repaid.
In the second letter, the borrower is
making the payments but the co-signer is handicapped in getting a loan of his
own because he would
be required to step in if the borrower defaults.
This is a loan qualification problem,
not a credit problem. Lenders impose limits on the amount of existing debt a
borrower can carry, and the co-signing obligation is considered debt for
qualification purposes.
This problem can usually be remedied by
documenting that the borrower has been making the payments on time for a
reasonable period. The lender in such case will probably remove the debt from
your loan application. You remain a co-signer, but the lender is ignoring your
obligation to the other lender in assessing your ability to repay a new loan.
"My nephew has asked me to co-sign
his mortgage. He says that after the loan is closed, I will be taken off the
deed and my obligation will terminate. Is this right?"
No. When you co-sign for a note, you
stay liable for the repayment of the note until it is paid off. Taking your name
off the deed does not eliminate that obligation.
"My brother in law has asked
me to co-sign for a home and the real estate agent tells me that after six month
of good payment by the borrower I can be removed from the title and loan. Is
this true?"
Probably not. It is strictly
up to the lender, who might let you off the hook in 6 months, or perhaps after
12 months, or perhaps never.
"I have been asked to
co-sign a rental agreement so a friend can get an apartment. Is this the
same as co-signing for a loan?"
They are very similar.
If you co-sign for a loan, you are on the hook until the loan is paid in full,
unless the lender lets you off. If you co-sign for a lease, you are on the
hook for the period of the lease, unless the landlord lets you off.
"If a student has a
co-signer for college loans and consolidates those loans when he is employed,
are the co-signers removed from the loans? If not, are the co-signers notified
of their position (responsibility) with the new lender/lenders?"
"Consolidation"
usually means that existing loans are repaid and replaced with a new loan. Where
that happens, any co-signers are off the hook. But sometimes
"consolidation" means that a third party has made a deal with a
borrower to receive payments from the borrower, with the third party passing on
the monies to the various lenders. In this case, the original loan contracts
remain in force and the co-signers remain liable. It is doubtful that the
co-signers will be notified in either case.
Copyright Jack Guttentag 2004
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