I received a letter from a reader last week who is in desperate straits.
She wrote: “I co-signed for a mortgage with a friend of mine and then transferred my interest in the property to her. Her name is on the deed while mine is on the mortgage. She has now stopped making payments on the mortgage and this is killing my credit. She says I have no recourse since her name is on the deed and mine is on the mortgage. Is this true?”
Unfortunately, my email correspondent has put herself into a pretty lousy situation. But she’s not alone. Judging by the mail in my box, many people don’t understand the true implications of “lending” a signature to a friend or relative — and how their actions can destroy in a few short months the fine credit history you’ve built up over decades.
Here’s how it works. Let’s say you want to buy a house. You can afford to make the payments (especially if you go without eating or heat in the winter). Unfortunately, the mortgage broker tells you that you don’t quite qualify under conventional lending guidelines.
With a conventional loan, a lender will allow you to spend up to 28 percent of your gross monthly income on your mortgage, insurance and taxes, and up to 36 percent of your gross monthly income on your total debt.
So you look into other kinds of loans to see if the numbers will work. With an FHA loan, and other portfolio loans (loans that are held by the lender instead of being resold on the secondary mortgage market) that allow you to stretch those lending guidelines to as much as 41 or 42 percent of your gross monthly income, the numbers still don’t work.
So you decide to ask your parents or a friend to “co-sign” the mortgage loan with you. You know you can make the payments, but you need help qualifying. It could be that the help you need is simply a credit problem — you make enough income, but don’t have good enough credit to qualify for a lower-interest loan.
If your Mom, Dad or a friend co-signs the mortgage with you, and goes on title, he or she is now a co-owner of the house. You’ve borrowed their credit, or debt-to-income ratio to qualify for the mortgage.
But once Dad is on the mortgage, he is responsible for the entire mortgage, should you default. And that’s what many people who “lend” their signature don’t understand. You’re on the hook for the entire mortgage payment.
While no one in his or her right mind would lend a signature to someone who seems untrustworthy, bad things happen to good people, and bad people sometimes fool their co-signers.
Your child or friend might lose a job, get sick, become an alcoholic or drug addict, or simply forget to make a mortgage payment. Once they are more than 30 days late, your credit history will start to be affected. If they don’t pay the real estate taxes on the property, the property could be sold out from underneath you at a sheriff’s sale.
While the co-signer’s name is on the title, you have some control over the situation. At the very least, you can sue your child or friend to sell the property to pay off the mortgage or back taxes owed.
But when the co-signer quit claims his or her interest in the property back to the child or friend, any leverage he or she had over the situation is lost.
Which is what happened to my email correspondent. By quit claiming her interest in the property to the friend, she ended up not on title (so, she was not an owner of the property any longer) but she was still responsible for the entire mortgage payment.
At this point, what she needs to do is consult with a real estate attorney who can lay out her options. She may be able to sue her friend (especially if the terms of the partnership were laid out before she lent her signature) or at least apply some pressure.
But it’s quite possible that this so-called friend will wind up causing her a tremendous amount of pain and suffering. And in the meantime, her good credit will suffer.
If you’re thinking about lending your signature to any child or friend, for any type of loan, including a school loan, car loan, or a mortgage, be sure to have an honest, heart-to-heart talk about the importance of making on-time payments. Be sure to explain to the person what will happen to your credit and his if payments aren’t made on time.
And then, just so everyone is on the same page, consider hiring an attorney to draft a simple partnership agreement that spells out what will happen if payments aren’t made on time, and what rights and responsibilities each party has.
You can’t always protect yourself when lending a signature, but you can try.
Published: Jul 29, 2006