What action can be taken against a co-signer of a mortgage if the mortgage goes into default?

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What action can be taken against a co-signer of a mortgage if the mortgage goes into default?

My husband and I are trying to buy a house together, but he’s on a mortgage for an old friend of his, who needed help securing the loan 5 years ago. The friendship is now strained, and the friend is unable (or unwilling) to refinance in just his name. If we force a sale, the friend will be very unhappy. What action could the bank take against my husband (or me) if the friend does something stupid and the house ends up worth far less than the outstanding mortgage? For example, could they take money from our joint account (which was all mine), my account, the house I own in Europe, etc.?

Asked on August 5, 2011 Texas

Answers:

FreeAdvice Contributing Attorney / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

Your question deals with the pitfalls of when someone is a co-signer on a loan for a relative and friend who is the primary borrower on the loan secured by real proprty. The problem for your husband is that he is obligated on the loan of the friend does not make its payments, but has no ownership interest in the real property securing the loan.

If the loan that your husband co-signed goes into default, your husband's credit score will be damaged. If the property he co-signed the loan for is foreclosed upon by the holder of its mortgage (trust deed), his credit score will be damaged further. Worse yet, if the loan is not "purchase money" and the home is sold for less than what is owed on the loan, he and the primary borrowers could be responsible for a deficiency judgment if your state does not have anti-deficiency laws.

If there is a resulting deficiency judgment in the event of a foreclosure (and your state has no ant-deficiency laws), there could be a judgment against your husband and the primary borrowers where your husband's assets could be subject to a levy to collect on the judgment.

I recommend that you and your husband consult with a real estate lawyer on the subject of the co-signed loan to safeguard your interests.


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