Q: I bought a house over a year ago with a balloon loan that comes due later this year. I had to get this loan because I cosigned a loan for a friend and she missed some payments. At the time, this was the only loan I could get.
After I closed on my loan, my friend was laid off and stopped paying her mortgage, the loan went into foreclosure but my friend and the bank came to some sort of agreement.
I am trying to refinance my loan but no one will consider my application. Can you please tell me what route I can take? Is there a way to legally remove my name from her loan even if she is unable to refinance because of her credit?
A: Unfortunately, you’ve put yourself in a really bad place. When you decided to move forward and buy a new place for yourself you knew you had trouble and decided to go forward anyway.
You were a kind and generous friend when you decided to cosign your friend’s loan. But once you knew trouble was brewing with that friend, you should have known better than to take on a new loan without cleaning up the mess that your friend had created.
When you cosigned the loan, you and your friend were both equally liable for the repayment of that debt. You should have known that if your friend failed to make a payment, your credit history and credit score would suffer. Furthermore, the bank is legally entitled to come after you for the money.
Once you knew that your friend had failed to make payments on her mortgage, another red flag should have gone up. At that point, you should have tried to see if you could help your friend catch up on her loan and then worked with her to see if that loan could be refinanced. You should have prepared yourself for the possibility that your friend could end up in financial trouble.
Right now, you have three big problems: First, But your credit history now is worse than it was when you took out the loan. Second, your home might be worth less – perhaps a lot less – than when you bought it. And third, your balloon loan is coming due and you won’t be able to refinance it.
In the boom years of the real estate market, you could sell the home and repay the loan and have money left over. These days, it’s a lot tougher to sell homes because of all the foreclosures for sale. Depending where you live, if you were even able to sell your property, you might lose money on the sale and wind up owing the bank more cash.
I’m not sure what your best option is at the moment, but here are a few things that come to mind:
You might be able to find some lender who will work with you to refinance your loan. But since your credit history took a considerable hit once your friend’s home went into foreclosure, don’t be surprised if the lender offers you an interest rate and loan terms that are quite different from the rates you see advertised.
Another option is to sell your home and try to get as much out of it as possible. If the home’s value has dropped, you may have to try a short sale. (A short sale is when you sell the home for less than what is owed to the bank.) Your bank would have to agree to the short sale, and you might be on the hook for the difference.
And finally, if you can’t sell the home, you can’t repay the loan and you can’t refinance the loan, you may find yourself going down the path of not being able to make your mortgage payments and your home could end up in foreclosure.
Talk to a local mortgage lender in your area to see if they might be willing to help you out. You probably won’t find a big box lender that can help you, but some of the smaller, local lenders that may end up keeping the loan on their books may have a loan program for you.
You may want to talk to your current lender and see if the company is willing to give you an extension on the loan. While it seems that many lenders do not make the rational decision these days, you could get lucky and your lender may decide that an extension of your loan is a better deal for them than having the loan go into foreclosure. (If they will extend your loan for another year or two, be sure to get the extension in writing.)
Finally, you may want to talk to a real estate attorney to discuss your options with you. If you decide not to see an attorney, you may want to talk to someone at a non-profit consumer credit counseling service.