Here’s Why You Should Never Co-Sign On A Home Loan

A few weeks ago, I received an email in my inbox from someone seeking advice on how to get out of a home loan she co-signed. The story is pretty scary: This woman (who wished to remain anonymous) co-signed to help her friend secure financing for a home, something her friend couldn’t get on her own because she was going through a divorce. The agreement was she would be on the loan for a year and then her friend would refinance to remove her. Cut to 10 years later and this woman is still on the loan. Her friend isn’t making payments regularly — and this woman’s credit is taking the hit. If this cautionary tale isn’t enough to dissuade any of you who want to help friends or family members by co-signing, here are four other reasons:

It’s risky business

Co-signing on a mortgage, or any loan for that matter, means you are taking on as much risk as if you were taking out the loan yourself. “When co-signing a mortgage, you own half of the rights of the property — your name is on both the title and the mortgage. You are 100 percent on the hook for the mortgage payments and late payments can negatively affect your credit and ability to purchase or refinance [your own property or other debts],” says Joel Schaub, Vice President of Mortgage Lending at Guaranteed Rate.

It can hurt your credit

If the loan is not paid by the primary borrower, you are legally obligated to make payments yourself. If the debt goes unpaid, your credit report will suffer the same negative impact as the primary borrower. The delinquency will appear on your credit report. “One small upside — and it is small — is [if all goes well with this debt] having one more thing that is being paid on time could improve your credit score,” says Bobbi Rebell, CFP and host of the Financial Grownup podcast. This small potential upside isn’t worth the risk.

You may feel it in your wallet

The woman who wrote to me said she hasn’t been able to get approved for a credit card — and she’s paid significantly more for everything from her apartment to her car. In other words, if payments aren’t being made or if they’re chronically late, your personal borrowing power will take the hit. Your ability to get a mortgage, a credit card, an auto loan, can be compromised.

It’s just a bad idea

“You are fully exposed to all the risks that the homeowner is in terms of liability for the loan. But it is worse because you presumably don’t actually own the home,” says Rebell. She also notes that if your friend, family member etc. needs a co-signer, it’s usually because there are factors in their financial history that make the lender worry in the first place. And that should make you worried, too.

With Hattie Burgher