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“For anybody listening, co-signing: it’s only there because the bank knows that person cannot pay.”
That’s Ramsey Show co-host Jade Warshaw on the Oct. 2 episode, as reported by 24/7 Wall St. (1) She was talking to a Phoenix caller named Brooklyn about a co-signed mortgage on her in-laws’ home — about $1,700 a month plus $315 in HOA dues, with payments missed and in-laws who, according to the report, “flat out will not” agree to sell. (1)
I served on the advisory board of my local Consumer Credit Counseling Service, and I’ve been a CPA since 1981. Warshaw is right, and I’d tell you the same thing if you asked me before you signed.
The Federal Trade Commission puts it plainly: a co-signer may have to pay up to the full amount of the debt, and the lender can come after you without first trying to collect from the borrower. (2)
Getting off the loan isn’t easy, either. Whether you refinance, assume the loan or ask for a release, you’ll need the lender’s approval. (3) The good news: low-cost help exists. (4)
If you’ve already signed — for your parents, your in-laws or your grown kids — here are 6 ways to protect yourself.
1. Understand you’re a borrower, not a reference
It’s tempting to think of co-signing as a favor or a character reference. It isn’t. The FTC says the creditor can report the loan as your debt, and if the main borrower pays late or defaults, that history can land on your credit report. (2)
For many consumer loans, lenders must give co-signers a notice that sums it up: “You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn’t pay the debt, you will have to.” Federal law doesn’t require that notice for real estate purchases, so you may never have seen it on a mortgage — but the warning applies all the same. (2)
So treat their mortgage like your mortgage. Ask for online access to the account, or have statements sent to you, so a missed payment never surprises you.
2. Push for a refinance in their names only
The cleanest exit is a refinance that takes your name off. Experian notes lenders generally prefer a refinance when someone wants a mortgage solely in their name, and you’ll need lender approval. (3)
If rates or their income have improved since they bought, that may be doable. Your original mortgage may not be your best fit anymore.
Compare refinance rates from multiple lenders in one place, then use calculators to estimate a new monthly payment and see how the numbers line up with your goals. Compare refinance rates now.
3. Ask about an assumption or a release
If they can’t qualify for a refinance, ask the lender two questions.
First, is the loan assumable? FHA and VA loans, and some USDA loans, generally are; conventional mortgages typically aren’t. (3)
Second, does the loan have a liability release clause? Some do, and it can remove a co-signer with the lender’s approval — but the lender has the right to say no. (3)
Quick gut-check — if your money advice is coming from random online influencers, you’re playing a dangerous game. I’ve been a CPA since 1981 and writing about money since before the internet existed. Sign up for the free Money Talks Newsletter and get expert advice that’s been tested by time.
4. Call a HUD-approved housing counselor
When payments are already behind, don’t wait. HUD-approved housing counselors give independent advice on defaults, forbearance, foreclosure and credit problems, often at little or no cost. (4)
You can find one through the Consumer Financial Protection Bureau at 855-411-2372. (4) Bring the borrower if you can. A counselor can sometimes say what a family member can’t.
5. Don’t let a death make it worse
Here’s a wrinkle few people think about. When someone dies, their family usually doesn’t have to pay their debts from their own money — unless, among other exceptions, they co-signed. (5)
In other words, if the borrower dies, the debt doesn’t die with them. You still owe it.
That’s why the borrower should consider term life insurance that would pay off the loan. If anyone depends on your income — a spouse, kids, even a mortgage cosigner — term life insurance is the cheapest way to protect them. And it costs less than most people think, especially if you lock in a rate now: premiums can rise with every birthday.
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6. Find out what’s really squeezing them — and be ready to sell
A missed mortgage payment is often a symptom. In my experience, the disease is often credit cards, medical bills or other debt eating the budget.
If debt is the first thing on your mind when you wake up, you’re not alone — and you have options. If you have $15,000 or more in unsecured debt, National Debt Relief is one of the most established debt-relief providers in the U.S.
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And if nothing else works, a sale may be the only real exit, just as the hosts said. Experian notes that selling can make sense if there’s equity in the home; if the home is worth less than what’s owed, a short sale needs the lender’s approval and can significantly harm credit scores. (3)
My honest take
If you’re the parent in this story — the one asking a grown child to co-sign — I’d ask you to think hard about what you’re really asking.
You’re not asking for a signature. You’re asking them to bet their credit, and maybe their own home, on your ability to pay. If the bank won’t take that bet, think twice before you ask someone you love to take it.
And if you’re the one being asked, it’s OK to say no. A kind “no” today beats a ruined relationship and a wrecked credit score tomorrow.
Sources: 1. 24/7 Wall St.; 2. Federal Trade Commission; 3. Experian; 4. Consumer Financial Protection Bureau; 5. Federal Trade Commission
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