- A co-signer will allow a borrower with a poor or limited financial history access to credit.
- A co-signer has no ownership rights to the home, car, or other financed property.
- Co-signers take on a lot of risk when they agree to guarantee a loan
Lack sufficient credit to qualify for a home loan, car loan, or another type of loan? You may be able to get that financing after all if you convince a co-signer to back the loan with you. But that conjures an important question: What rights does a co-signer have on a house? For that matter, what rights does a co-signer have on a car? And what co-signer rights apply to other property acquired via a loan?
Explore what it means to get and be a co-signer on a loan, the advantages and disadvantages of having a cosigned loan, co-signer rights to the property being financed, and what happens when a conflict involving the signer or co-signer emerges.
What Is a Co-Signer on a Loan?
A co-signer is a second party who, along with the first party (the primary signer/borrower), signs a mortgage, car loan, or other loan and serves as a “guarantor” on that loan. Co-signers guarantee that they will make good on the loan if the borrower defaults (fails to repay it as agreed).
“Cosigning a loan makes you liable to pay off the debt if the borrower cannot do so. The co-signer promises to pay off the debt if the borrower stops repaying or defaults entirely,” says Lyle Solomon, a financial expert and attorney with Oak View Law Group in Rocklin, California.
A co-signer is different from a co-borrower. Co-borrowers apply financing along with the primary signer/borrower. While both the primary borrower and co-borrower are responsible for loan repayment, the co-borrower can claim an ownership stake in the collateral (the home, car, or other property). That means a co-borrower may have the right to reside in the home or use the vehicle or other property financed by the loan.
A co-signer, by contrast, has no ownership rights to the home, car, or other financed property.
A co-signer can guarantee secured loans or unsecured loans. A secured loan requires the pledge of collateral, such as the home or car being financed; if the borrower cannot repay the debt, this collateral is forfeited. An unsecured loan, such as a personal loan, consolidation loan, student loan, or credit card, requires no collateral.
Pros and Cons of Being a Co-Signer
The main benefit to the borrower is that a creditworthy co-signer can improve the borrower’s chances of getting approved for a loan. The co-signer’s agreement to sign the loan may also help the borrower to get a lower interest rate or larger loan.
“A co-signer will allow a borrower with a poor or limited financial history, especially a young person, to get access to more financing than their credit score would suggest for things like car loans, apartments, and mortgages,” explains Martin Orefice, CEO of Rent To Own Labs.
There is no drawback to the borrower in getting a co-signer on their loan. However, this is not a win-win scenario for both parties; the risks and disadvantages fall squarely on the co-signer.
“The co-signer can be held responsible for a debt in a situation where the primary borrower cannot or won’t repay the loan,” Orefice continues. “The good news for the co-signer is that they are the secondary, not the primary, person responsible for repayment. And they are not putting up any of their own property as collateral for the loan.”
However, per the Federal Trade Commission, in some states, if the primary borrower fails to make some payments, the lender might try collecting money from the co-signer before approaching the borrower.
Consider, too, that a co-signer may have to pay interest, late fees, and collection fees in addition to the loan amount if the borrower defaults, Solomon notes.
“The co-signer’s credit can also be significantly damaged if the borrower defaults on the loan and repayment is not made,” he adds. “Cosigning a loan might also result in a rejection of credit applied for by the co-signer. A lender might calculate the co-signer’s total debts, including the cosigned loan, and determine that it’s too risky to grant money or a line of credit to this co-signer.”
Who Makes a Good Co-Signer?
A co-signer takes a leap of faith that the borrower will live up to their financial responsibilities and can afford repayment over the life of the loan. That’s why many co-signers turn out to be parents or relatives of the borrower – kin who believe they can trust the borrower to repay their debt.
“Good co-signer prospects include a spouse, parents, or someone close to the signer. When you are related to or close with the signer, you feel more of an obligation to repay your loan. You don’t want to disappoint the co-signer and jeopardize your relationship,” says Matthew Laramy, a salesperson with Prestige Chrysler Jeep Dodge Ram in Longmont, Colorado.
A co-signer must have enough income and an adequate credit score to help the borrower get approved for a loan.
“Before agreeing to be a co-signer, it’s important to carefully review your finances, credit reports, and credit score and ensure that you have enough funds to initiate this risk,” suggests Solomon.
Risk to the Co-Signer
Co-signers take on a lot of risk when they agree to guarantee a loan. Not only are they responsible for repayment if the borrower defaults, cosigning for a loan can harm the co-signer’s credit rating. If the primary borrower makes a late payment, it may appear on the co-signer’s credit report and score. If a creditor repossesses a car or forecloses on a home, the co-signer’s may take a hit.
And even if the borrower doesn’t default, co-signing on a loan can make problems for co-signers when they try to get their own mortgage or other loan. That’s because cosigning for a loan creates “contingent liability,” a debt that might be owed. That extra debt increases the co-signers’ debt-to-income ratio when they apply for a loan and reduces what they’re qualified to borrow.
Usually, a co-signer has to prove that the primary borrower has been making on-time payments on the loan for at least 12 months before prospective lenders stop considering the co-signed loan as a debt.
What Rights Does a Co-Signer Have on a House?
According to Solomon, a co-signer has no legal right to occupy a home as a primary or secondary residence, unlike the primary signer/borrower. Their name does not appear on the title, and they will not sign the home’s deed.
“A co-signer doesn’t actually gain ownership of anything when they cosign a loan. They simply agree to help pay the debt if needed,” says Orefice.
What Rights Does a Co-Signer Have on a Car?
The same applies to a co-signer on a vehicle loan. Cosigners have no ownership claim on the automobile, only an obligation to pay back the money borrowed on the car.
“As a co-signer, you are equally responsible for the auto loan. If the main signer decides to no longer keep up with payments, it is your responsibility to make those payments or suffer the consequences,” Laramy cautions.
In other words, there are no co-signer rights on a car being financed, only risks to the co-signer. That’s why the borrower and co-signer must have confidence in one another and trust the other party to be financially responsible.
What Are Co-Signer Rights to a Property?
Let’s say you need a co-signer for another kind of loan or line of credit, such as a student loan, personal loan, consolidation loan, or credit card. Regardless of the type of financing, the fact remains: There are no co-signer rights to the property, car, or other item being financed or to the goods or services purchased with a credit card.
“Whether the co-signer signs a secured or unsecured loan, the co-signer has no legal rights to the item being financed or any collateral involved,” Solomon says.
Co-Signer Rights When a Dispute Occurs
Curious what happens if a conflict arises between a borrower and co-signer? Can co-signers remove themselves from the loan they signed?
“If a dispute arrives between the co-signer and primary borrower, the co-signer will likely lose, as they have no leverage,” adds Solomon. “If the borrower defaults, the co-signer has no legal right to the collateral. So no matter how hard the co-signer tries to take legal action for claiming the asset, the result will be the same – an evident loss for the co-signer.”
However, the borrower may be able to free the co-signer from the loan via paperwork called a “co-signer release” if the lender agrees.
“There are a few ways to legally get you off the cosigned loan. The first step would be reviewing your three free credit reports at regular intervals. You need to identify any issues affecting your credit score,” recommends Solomon. “Work on these issues by, for example making regular bill payments and reducing the number of credit cards you have. Once you improve your credit score, the lender may consider you eligible to be removed as co-signer from the loan upon request.”
Refinancing a Cosigned Loan
If interest rates drop and you qualify, you may want to refinance your cosigned loan. That begs several questions. What rights does a co-signer have on a house that’s refinanced? What rights does a co-signer have on a car being refinanced? And are there any co-signer rights to the property being refinanced via other types of loans?
“Legally speaking, when you refinance an auto loan, as long as the first signer can be approved for the loan on their own, they can refinance without the co-signer,” says Laramy.
Solomon says the same is true for other types of financing, including mortgage loans, student loans, personal loans, and consolidation loans. Likewise, once you build better credit as the primary borrower, you should be able to qualify for credit cards without needing a co-signer.
Struggling with debt?
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Auto loan debt was $1.50 trillion and credit card was $0.89 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in Illinois credit card delinquency rate was 3%, and the median credit card debt was $397.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.