Reclaiming Property from a Cosigned Loan Text Size:

It isn't unusual for someone to approach family or friends to ask them for help in obtaining a loan. In the wake of the foreclosure crisis, banks are toughening their requirements for all types of loans. Borrowers must meet strict income and credit requirements, and many potential borrowers now need the help of others to meet these requirements. But how can you avoid problems if one of the borrowers fails to make the loan payments?

Before agreeing to help someone obtain a loan (particularly in cases where the other borrower intends to make all loan payments), you should understand your obligations, and carefully consider the implications if the other borrower fails to make the loan payments.

Are You a Co-Signer or Co-Borrower?

There are two terms to describe a person who helps another person get a loan: co-signer and co-borrower (sometimes called co-mortgagor).

A co-signer and co-borrower both:

• Use their good credit and income to help someone obtain a loan
• Are legally obligated to make the loan payments if the other borrower fails to make payments
• Can be sued by the lender if the other borrower fails to make payments
• Can damage their credit history if the other borrower is late in making payments or misses payments entirely

However, there's one important difference: A co-borrower will be listed on the title to the property, meaning the co-borrower actually co-owns it. A co-signer is not listed on the title, and has no legal claim to the property.

Be Prepared Before Getting the Loan

Before agreeing to co-sign or co-borrow a loan, have a lawyer draw up an agreement between you and the other borrower. This agreement should include the following details:

• Who is responsible for making the payments? How much and how frequently are payments due?
• What happens if one borrower fails to make payments and that responsibility falls to the other borrower? Will the first borrower sign over their ownership interest in the property to the co-borrower?
• If one borrower is relying on the co-borrower/co-signer for their credit history, will the loan be refinanced after a certain period of time in an effort to remove the co-signer/co-borrower from the loan?

What if Something Goes Wrong?

In the worst possible situation, you'll have co-borrowed or co-signed a loan for someone who fails to make payments in a timely fashion. When this happens, the loan goes into default (meaning the borrower has failed to meet the obligations of the loan). When this happens, the co-borrowers and co-signers face serious consequences.

If a loan goes into default, as a co-borrower or co-signer you may:

• Be asked by the lender to pay the money that is owed
• Be sued by the lender, or have your wages garnished to pay for the debt
• Be responsible for late fees or collection costs charged by the lender
• Have the late or missing payments, or court judgment against you, reported to the major credit bureaus, thus damaging your credit

To protect your credit history, you should make the necessary payments to avoid defaulting on the loan. Then, you'll have to address the problem with the other borrower. Among the issues and options to consider:

• Can the other borrower repay the money you spent to get the loan out of default?
• Is the other borrower able to continue making payments, or should the property be sold immediately in an effort to protect your credit ratings?
• If the other borrower cannot afford to continue making payments, do you want to assume payments and ownership of the property?
• If you are assuming payments, or the borrower cannot repay the money you spent to get out of default, will the other borrower sign his ownership interest over to you?
• If you co-signed the loan and want to take responsibility for the property, can you refinance the loan to get your name on the property's title, or will you have to legally buy the property from the borrower or bank?

Questions for Your Attorney

• What is the difference between a co-borrower and a co-signer?
• What happens if my co-borrower stops paying on the loan?
• What kinds of steps should I take against a co-borrower after getting the loan out of default?

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