Co-signing a mortgage can have serious consequences that need to be clearly understood

Great care and caution is required when co-signing a mortgage. The following scenario is typical of what can happen when things go wrong.

Let’s suppose your house is paid off and you have enough saved and invested to allow you to retire comfortably. Your daughter has graduated from university and has landed a very well-paying job and soon after bought a house. You helped with the down payment so that mortgage insurance would not be needed. When she couldn’t qualify for a mortgage due to student and car loans, you co-signed.  

Unfortunately, she lost her job in a wave of layoffs. When you expressed concern about her financial situation, she assured you she was handling things. Then you received a demand letter for the arrears on the mortgage.

Co-signers think they’re just helping the primary holder qualify but they’re responsible for everything, including any condo fees, insurance and taxes. By co-signing a mortgage you become responsible for the full balance owing plus any arrears and the full amount becomes part of your credit profile.

If the mortgage goes into arrears, it could have a negative impact on your credit rating. Now you are beginning to wonder if it will affect your retirement plans. Apparently, this situation is not uncommon.

The dangers of co-signing a mortgage

Parents often co-sign mortgages without realizing the legal implications. Here are some things you need to know:

  • A co-signer assumes the same legal responsibility as the primary mortgage holder for the mortgage, legal fees, taxes and insurance
  • The debt becomes part of the co-signer’s credit report and must be disclosed on subsequent credit applications
  • A co-signer should seek independent legal advice. Draft a separate agreement with steps to take in the event of a divorce or other significant change
  • All parties must agree beforehand if they will sell the house to cover any arrears; however, the co-signer has the legal right to go to court to force a sale
  • As co-signer, you have a legal right to know whether the mortgage is up-to-date, and can request copies of the statements and other correspondence. This way you won’t be blindsided with a demand letter if the loan falls into arrears
  • Parents sometimes give a down payment for a house as a wedding gift to their children. That down payment then becomes part of the child’s family assets and value of the house. If the child’s marriage fails, the parents have no legal right to receive the down payment back

Back to the hypothetical scenario; your daughter is several months behind in payments meaning she owes a lot and counting. She received several notices but was too embarrassed to tell you, not realizing you would also be held financially responsible because of co-signing a mortgage.

She’s been making partial payments on all her debts, reasoning that something is better than nothing, but hadn’t asked the bank for help.

The solution

Most people don't realize that when they co-sign a mortgage they have a right to ongoing details about the status of the debt. It’s vital to immediately contact the bank to have all mortgage correspondence directed to you and to discuss a repayment strategy.

People are afraid that banks will foreclose if you tell them you’re in trouble. But they’ve seen it all before. It’s important to contact them at the first sign of difficulty so they can work with you.

Your daughter had to review her finances and was placed on a strict budget based on current income from unemployment insurance and her severance package. She also worked with the bank to change the terms of her mortgage. By changing her amortization to 25 years, her loan type to five-year fixed and her payments to monthly, she was able to save a substantial amount each month. She also found a roommate to help with expenses.

You can draft a legal agreement with your daughter for repayment of the arrears owed for helping with the down payment. She can agree to make monthly payments to you and she can do temporary work to make ends meet. When she finds a better job, she will rework her budget.

Clearly, there are many things to consider before co-signing a mortgage.