What Happens to Co-signers on a Foreclosure?

Co-signing on a home mortgage is always risky, because the bank or mortgage company can hold the co-signers 100 percent responsible for the loan after foreclosure. Co-signing for a home mortgage works the same as co-signing an automobile loan. The difference is that co-signing for a used car may create a liability of only several thousand dollars, while co-signing on a house could mean accepting responsibility for a loan of $150,000 or more.

Foreclosure Process

Foreclosed properties are eventually sold by the bank or mortgage company. The bank takes possession of the home from the owner and schedules it for an auction or private sale. The sales price is applied to the balance remaining on the loan, with the former owner -- and the co-signers -- held responsible if the proceeds from the sale do not pay off the remaining mortgage balance.

Negative Equity

Some foreclosed properties are worth less than the balance of the loan, creating a situation known as negative equity or being "upside-down" on the mortgage. Houses sometimes rapidly lose value during a recession or real estate slump. A house purchased at the height of a housing boom could lose half its value during a severe recession and downturn in the real estate market. Homeowners facing foreclosure with an upside-down mortgage could easily owe the bank $50,000 or more after foreclosure, with co-signers held equally responsible.

Deficiency Judgment

Some states allow banks to file lawsuits to collect any balance remaining after a house is foreclosed and sold. Co-signers are treated like owners, allowing the bank to file separate lawsuits against them for the full amount due. There is no way out of the mess for co-signers, unless they can prove that they never agreed to co-sign and that their signatures on the loan application are fraudulent. Bank lawsuits after foreclosure often lead to default judgments ordering the owner or co-signers to pay the full amount due.

Garnishment

Bank or wage garnishment is possible if the owner or co-signers fail to pay the judgment in full or make payment arrangements. Bank garnishment allows the mortgage company to freely withdraw money from checking accounts held by the owners and co-signers until the debt is paid. Wage garnishment allows forced payments from paychecks.

Alternatives

Co-signers on a mortgage loan should treat the loan as their own, including paying the past-due mortgage payments to stop the foreclosure, if necessary. Bringing the account current and continuing to make monthly payments is preferable to foreclosure. The co-signers can also work with the owners on other foreclosure avoidance solutions, including loan modification, which changes terms of the loan to make it more affordable. If the house is foreclosed, the co-signers should negotiate a settlement with the bank on any remaining balance. Settlement allows for payment of a debt for less than the full amount owed.