real estate

There's little hope for co-signer

Steve McLindenq_v2.gifDear Steve,
I was a co-signer for a home loan for my son, and now the lender is after me because my son can't pay the mortgage and has missed payments. I was only recently made aware that he is in arrears. Can I get off the loan? Am I stuck?
-- Loria

a_v2.gifDear Loria,
I'm sorry to have to tell you that as a co-signer, you are on the hook for that loan every bit as much as your son. And I implore you to move quickly to remedy the situation and explore all your options before you and your son have a default on your collective hands. Unfortunately, your credit is being damaged along with your son's credit.

First, can you afford to get up to date on the loan and possibly rent the place out to generate a little cash flow? I'll assume your son will be happy to let you take control of the situation. If you don't think you can rent it quickly, you may want to enlist an agent who is a short-sale specialist and who will attempt to work with your lender to approve such a sale on the property.

But typically, short sales are only approved if the difference between the money owed on the house and sales price are reasonably close. If that's not acceptable to the lenders, talk with them about your options. However, I'm afraid your eligibility for the mortgage-assistance and refinance options under the federal housing stimulus plan was likely compromised by the nonpayments.

However, you could ask the lenders if they can offer a similar internal program or modify the existing loan. Lenders don't want to foreclose because it costs them so much money, so they may decide it's better to cut you some slack. Your only "out" would be if the lenders agree to refinance in your son's name only, and this is very unlikely.

If the home loan is now default, you will probably be contacted by so-called "hard-money lenders" offering you money at very high interest rates and points to buy your way free of a foreclosure. Unless the financial situation of you and/or your son have improved dramatically, this is generally a bad idea because you will only dig yourselves into an even bigger hole.

"Distress buyers" will probably contact you as well, offering you less than what the property is worth. Without knowing how much equity you have, this may or may not be a good option. Bankruptcy lawyers also will offer their services, but you don't want that on your record. You'd best consult a different kind of attorney -- of the real estate variety -- who can look at all the facts and financials and make a recommendation.

The kicker in all this is that your son, as the owner, still legally has control of the property. So technically, he'd have to agree to go along with whatever course you take. As you can see, your rights as a co-signer are few, while your liabilities are great. I'm always happy to see relatives pulling together, but co-signings and money issues have weakened many a familial bond.

I hope everything works out for you with minimal damage to your credit. Don't hesitate to address the problem because the solutions will only grow more expensive, and you might find yourself with a foreclosure on your record.

Read more Real Estate Adviser columns and more stories about mortgages. Also, read more about foreclosures, refinancing and mortgage modification.

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