What Happens When the Mortgage You Cosigned Is Defaulted
Co-signers get few rights and a large amount of responsibility when it comes to mortgage loans. You have no rights to the property but all the responsibility for the bill. When the primary borrower fails to pay, the mortgage loan goes into default. At this point, credit scores decline, collection calls begin and the co-signer is notified. In most cases, the lender will allow you to bring the account current before the foreclosures process begins.
When a mortgage goes into default, the lender calls you and the primary borrower to collect on the past due payment. Once the account becomes 30 days past due, it appears as a negative mark on your credit report and subsequently drops your credit score. After the primary borrower miss several payments — typically three to six months’ worth — the lender makes a final demand for payment before foreclosing on the house. The exact number of payments missed before foreclosure varies among lenders. Of course, you can rectify the situation by paying the past due amount as soon as you learn about it.
Types of Foreclosure
Your lender has two avenues for foreclosure: non-judicial and judicial. A non-judicial foreclosure occurs when the mortgage loan contains a power-of-sale clause. This allows the trustee, or lender, to sell the home to recover the balance of the loan in the event the primary borrower defaults. Judicial foreclosures require a court order to sell the house. After the lender receives the court order, the home is auctioned off to the highest bidder. The lender can pursue a deficiency judgment for the remaining balance of the house.
Cancellation of Debt
If the lender pursues a non-judicial foreclosure, you’ll receive a 1099-C Cancelation of Debt form at the beginning of the following year. When a lender writes off debt, you must claim that amount as taxable income on your taxes. The increase in income could increase your total tax liability for the year.
A deficiency judgment is issued by the court for the leftover balance on the mortgage note after the home is auctioned off. As the co-signer, you are responsible for paying the remaining balance even after the sale if the court orders a judgment. With a judgment in hand, the mortgage lender can pursue garnishments against your wages or bank account. A judgment appears on your credit report for seven years.
Even though the primary borrower has the property rights and the ultimate say in solving the problem, as co-signer, you have few options to rectify the situation short of paying the bill. The primary borrower could pursue a short sale, where he sells the house for the balance due, without your input. In the absence of a remedy, however, the best option is to set up a repayment plan to bring the account current.
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