Why Co-Signing is a Bad Idea

I co-signed for my sister to buy a home, but she stopped paying the mortgage. This has ruined my credit and I do not know what to do about the difficulties I myself am having with my own mortgage. I am working with my bank on a loan modification. What else can be done at this point?

May 11, 2012 - Answered by Al

Al's Answer:

I am sorry to hear about what happened. You were trying to help a loved one and it worked against you.
 
Unfortunately, this story is not uncommon. Many financial professionals advise against ever co-signing a loan, except possibly in the case of parents trying to help a responsible child and only after establishing that the co-signer could afford to take over the payments.
 
This is because if the primary borrower doesn’t repay, the lender may go after whomever they are most likely to collect from, which (as you’ve learned) could be you. A statistic from several years ago from the Federal Trade Commission is telling: “as many as three out of four co-signers are requested to make payments on a loan.” And regardless, co-signing puts your credit rating at risk.
 
In your case, it sounds like you have taken the right first step in contacting your lender to work out a modification of your loan. It is likely to be in your lender’s interest to work with you to explore options. If this proves unsuccessful, you may find help from the U.S. government mortgage assistance programs; visit www.makinghomeaffordable.gov for more information.
 
Also, consider seeking help from a qualified credit counselor. Proceed cautiously; as the U.S. government Federal Trade Commissions’ website reports:
 
“(s)ome credit counseling organizations — even some that claim non-profit status — may charge high fees or hide their fees by pressuring consumers to make ‘voluntary’ contributions that only cause more debt.”
 
To point you in the right direction, consider contacting the National Foundation for Credit Counseling: www.nfcc.org.

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