If a close friend or family member has asked you to cosign for a loan, there are a number of things you should consider before agreeing to act as a cosigner. A cosigner essentially has full responsibility for the loan, in most cases. If the primary borrower defaults on the loan, the lender can attempt to collect from you. In some cases, a lien could be attached to your own home for the amount due on the loan.
Why Would You Need To Cosign?
If someone applies for a loan and the lender does not feel that she meets the qualifications for it, she may be asked to secure a cosigner. While each lender has its own qualifications and each situation is different, there are two common reasons why a person may be required to secure a cosigner: either the borrower does not meet the income requirements for the loan, or she has a poor credit history. Regardless of the reason, if a lender requires a cosigner it is because the lender is not convinced that the borrower will repay the loan.
Cosigner Liability
When you agree to cosign for a loan, that typically means you are legally liable for the entire debt, including interest and any costs associated with collecting the loan. Furthermore, in some states, the lender is not required to attempt to collect the debt from the primary borrower before coming after you to collect the debt. The debt may not even need to be considered officially in default before the lender can attempt to collect from you. In other words, if the primary borrower misses a single payment, the lender may be able to immediately contact you for the payment. State laws vary with regard to whether or not the lender must first attempt to collect from the primary borrower, but in all states the cosigner is ultimately liable for the entire debt.
Default
If the primary borrower defaults on the loan, the lender may file a lawsuit against both the primary borrower and you, as the cosigner. If the lender obtains a monetary judgment as a result of the lawsuit, it will be against both of you. Since the lender likely knows that the primary borrower is unable to pay the debt, and has few assets, the lender will likely turn to you to satisfy the judgment. In many states, a creditor may attach a lien to your home if it has a judgment against you. Most states allow a homestead exemption which exempts your home from attachment up to a certain dollar amount; the amount varies widely by state. If, however, you have more equity in your home than the homestead exemption allows, you may find a lien attached to your home.
Considerations
Cosigning for someone can have serious financial consequences if the person defaults. While you may not actually lose your home, you could wind up with a large lien attached to it that you are forced to repay. In addition, if you cosign for a large loan, such as a mortgage, it may affect your ability to acquire your own loan or refinance an existing loan, because you are considered responsible for the entire amount of the loan for which you cosigned.
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