Planning for the Unthinkable
Kindness is magic, it’s said. And one of the most important examples of kindness is demonstrated by the person who backs someone else’s mortgage with no expectation of personal benefit. No one wants to imagine the death of a hero. But it’s important to look ahead and prepare for the most serious difficulties when major financial decisions are made.
First, why is someone co-signing? For some borrowers, it can seem impossible to get a green light for a mortgage from any lender. A co-signer’s financial backing is the only way to homeownership. Maybe the hopeful buyer is self-employed, has a thin credit history, a recently accepted job, or a higher than 43% debt-to-income ratio. With the lender’s permission, a relative, friend, or partner could co-sign, assuring the lender that repayment will occur if the primary borrower runs into financial issues.
A financial setback not the only what-if scenario, though. Borrowers also need to plan for any of life’s curve balls — including a co-signer’s death. Let’s look at the potential pathways ahead, should this unfortunate situation arise.
Is the Co-Signer Also a Co-Borrower and a Co-Owner?
Imagine that a mortgage co-signer, Helen Helper, dies unexpectedly. The primary borrower’s mind starts to race. Will Helen’s surviving family members be pulled into the obligation? Will the lender insist on a new co-signer? Will the whole loan come due? Will refinancing be necessary?
The first factor to determine is who is named on the deed. Is it just the primary borrower, with no mention of the co-signer? A person who is simply co-signing has agreed to back the mortgage, but isn’t named on the house title and therefore holds no ownership interest in the real estate. The agreement serve as a backup for the debt will appear on the co-signer’s credit history, but this person does not have an actual stake in the property. For mortgage loans, lenders typically want the extra person on the loan to be a co-borrower and a co-owner — not just a co-signer. This way, the financially stronger individual has an interest at stake.
So, most co-signers are really co-borrowers and indeed they are named as co-owners on the house title. A co-borrower won’t necessarily live in the home with the primary borrower. The extra person may have gone on the title and shouldered the debt risk simply to help the primary borrower buy a house. So it’s the primary buyer who lives in the house, and actually pays the mortgage company.
The co-borrower relationship typically anticipates a future transfer of the title into the primary homeowner’s name alone. Once the primary borrower is in the position to refinance the home independently, our hero, Helen Helpful, can sign a quitclaim deed, effectively transferring the property to the primary borrower alone. All’s well that ends well. But the question is what to do if Helen dies before that successful refinancing can occur.
Pro tip: Federal Housing Administration loans on a property are assumable by the next owner. An FHA loan may enable a buyer to get approved for a loan with a co-borrower. Then, instead of having to refinance later, the primary borrower can eventually assume the loan, independently, without disrupting the rate and terms. Note that the FHA requires borrowers to pay an extra monthly amount to cover mortgage insurance.
How Are the Co-Borrowers Vesting Their Ownership?
In the case of co-ownership, the deed itself will say how the deed is vested. This is the co-owners’ decision. If the home is co-owned by the two signers as joint tenants with right of survivorship, then the joint owners are planning to pass the entire interest to the other upon either owner’s death.
If survivorship language doesn’t appear on the deed, the primary borrower and the co-borrower are tenants in common. In this case, they are deciding that each co-owner has an interest (which could be equal or unequal to the other’s) that would pass to that person’s heirs.
No matter whoever receives the deceased co-owner’s share of the real estate, the mortgage company’s priority is receiving monthly payments.
What does this mean? If either party dies, the surviving co-borrower named is on the mortgage agreement — regardless of who has the ownership rights in the property — takes responsibility for paying the mortgage.
As a general matter, as long as timely mortgage payments continue to be made, the lender should not have an issue with the primary borrower. That said, the mortgage loan contract should be checked for clauses that address this situation. The contractual language may make a co-signer’s estate liable for the debt if the co-signer dies, until the final payoff of the mortgage. As long as the primary borrower keeps those payments coming as agreed, this should be no factor for the co-signer’s estate.
If nobody makes payments on the loan, it will go into default. The mortgage company will ultimately foreclose on the home. Should the foreclosed property sell for less than the mortgage debt, the lender could pursue the primary borrower and the co-signer’s estate for the remaining debt. This is not because the heirs are forced to pay the mortgage, but because co-signers remain responsible for their contractual obligations.
A primary borrower whose financial situation makes the monthly mortgage payments too steep to handle should set up an appointment with the mortgage company about a potential loan modification, to mitigate loss to the company and make the payment terms affordable to the homeowner.
A Final Word to the Wise
The policies of succession to a mortgage differ by contract, by lender, and even by state law. This is why the parties are well advised to consult a lawyer at the planning stage, to create a legally sound agreement that includes their intentions if, for any reason, something goes awry. The possibility of a co-owner’s death during the parties’ relationship as co-borrowers is one of the various scenarios the co-borrowers need to anticipate.
By planning for the hardest situations, co-borrowers can attain the peace of mind that good planning provides. Sound planning also helps the primary borrower to consider the kind of safety net that could be necessary, and to put that net together.
Supporting References
Victoria Araj for Rocket Mortgage, LLC via QuickenLoans.com: What Happens to a Mortgage When the Borrower Dies? (Nov. 11, 2019).
Rocket Mortgage, LLC via RocketMortgage.com: Who’s Responsible For A Mortgage After The Borrower Dies? (Dec. 15, 2021).
Robert Morello for The Nest:How Is a Co-Signer Responsible on a Mortgage? (updated Sep. 9, 2019).
Jessica McElrath for The Nest: Can the Obligation of a Co-signer Be Discharged?
Monica Lee for the Legal Reader: Who Inherits the Property After the Death of the Cosigner? (Dec. 13, 2021).
Michelle Miley for Home Guides via SFGate.com: Does a Co-signer Need to Be on the Title of a House? (updated Dec. 11, 2018).
Atty. Gary M. Singer for the South Florida Sun Sentinel: Ask a Real Estate Pro: If the Co-Signer of My Mortgage Dies, Who Inherits the Property? (Jan. 7, 2021).
Deeds.com: Owning Property in Unequal Shares, as Tenants in Common (Jul. 16, 2020).
Deeds.com: How Getting a Mortgage With a Co-Borrower Affects the Deed (Aug. 5, 2019).
Photo credits: Leah Kelley and SHVETS Production, via Pexels.