What are the responsibilities of a cosigner?

Agreeing to be a cosigner on a loan can be a great way to help someone with lesser credit purchase a home, obtain a vehicle, or rent an apartment. If the lender makes his payments on time and in full it can help him raise his credit profile and enable him to obtain future loans on his own. However, cosigning a loan is a great deal more than a favor and it carries some big responsibilities. If you are considering cosigning a loan, you should realize your legal liabilities and the consequences that could occur should the other signer default on his responsibilities.

When a cosigner enters into a loan agreement he is promising to assume responsibility for the debt should the borrower ever default on the loan. This means simply that if the borrower stops making payments the cosigner will have to take over the payments. You may even be responsible for the full payment of the loan in the event that the borrower dies or is disabled. Anne Reed of Acceptance Mortgage in Sparta, New Jersey is an expert on loans.

"The cosigner, or in many times, the co-borrower is equally responsible for the debt," Reed said. "The debt will be reflected on the co-signors credit report and may negatively impact the person's credit should the debt become delinquent." Anne adds, "If the primary borrower cannot pay the debt, the lender will pursue the co-signor just as equally as the primary borrower." In some cases the lender may only go after the cosigner.

If you cosign on a home loan and the borrower does not make his payments, you will be responsible for making the payments even though you do not live in the home. The same rule applies for the purchase of a vehicle. Even though you do not have possession of the vehicle, you are responsible for the payments. The borrower will be driving around in a vehicle or living in a home that you are paying for, and it can be a nightmare to extract yourself from this situation. You will not only be responsible for any arrears of the loan; you will also be responsible for any late fees, additional interest, and collection fees.

In the instance of cosigning for a tenant, you will have different responsibilities. When you cosign to help someone obtain an apartment you will be responsible for any unpaid monies such as back rent and the fulfillment of any lease. In addition to money for rent, you will be responsible for any damages the tenant incurs on the property no matter how high the cost. You need to be sure that the borrower is someone you can trust to hold up his end of the agreement and to treat the property with respect.

Any loan you cosign will be reflected on your credit report so it will be your responsibility to make sure the loan does not go into default.

"Also, the cosigner debt may be included in the cosigner's debt-to-income ratios if the cosigner decides to apply for new credit on their own," Reed said. "Some lenders will allow the cosigned debt to be 'backed out of' their debt-to-income ratios providing that the cosigner can provide proof such as 12 months of cancelled checks from the borrower showing that the cosigner is not paying the debt."