Question: I have a situation where my wife is a co-signer for her mother on a new house. Since her mother does not make much money, my wife thought that she could help her mother qualify for a larger loan amount. Can my wife do a quitclaim deed, and if not, how long would she have to stay on the mortgage? If we were to buy a new house in the future, would that affect our credit?
Answer: Many people incorrectly use the term co-signer to describe your situation, but in reality your wife would be a full co-borrower on her mother’s loan. That means she would be fully responsible for all the payments.
There is no division of financial responsibility. In other words, if you are one of two co-borrowers on a mortgage, that does not mean that you are liable for only half the mortgage payment. Each borrower is fully liable for the entire loan if the payments are not made.
That’s why mortgage lenders insist that anyone who appears on the loan documents as a borrower or co-borrower must also appear on the title as an owner of the property. The lender wants to make sure that all borrowers have a vested interest in maintaining the property and making the loan payments on time.
Even though your wife could use a quitclaim deed to take her name off the title to the property after the purchase loan closes, that would not be a smart thing to do. Here’s why: If her mother failed to make the mortgage payments for whatever reason, your wife would still be an owner of the house, and she could sell it recover her money.
On the other hand, if she deeds the property to her mother, she you would give up all of her ownership rights to the property, but she would not be relieved of responsibility for the mortgage payments. In other words, if her mother stopped making the loan payments, it would be her house but your problem.
I’m sure that you trust your mother-in-law not to take advantage of you, but as regular readers of this column know, I constantly preach that you should always be prepared for the worst-case scenario in any real estate transaction. So I think it’s safer for your wife to remain on the title rather than giving a quitclaim deed to her mother in order to protect your financial interests in case something goes wrong.
And that brings me to your next question. As long as your wife is a co-borrower on her mother’s mortgage, it will show up on your credit report any time you apply for a new loan.
That’s why it’s important to make sure that her mother always makes her mortgage payments on time, or it will adversely affect your credit rating. Also, because your mother-in-law’s mortgage appears as a debt on your credit report, it may limit the amount of mortgage you could qualify for if you decide to buy another home in the future.
The only way to get the mortgage off your credit report is to have your mother-in-law refinance the mortgage in her name only. But since she has very little income, that would probably not be possible.
There is a way to get around this problem, however. Once your wife’s mother has been making the mortgage payments totally on her own for at least 12 months, she could provide you with photocopies of her canceled mortgage payment checks to prove it.
You would then take those photocopied checks to a mortgage lender to show that you are not making the loan payments, and in most cases that mortgage would be removed from your debt-to-income ratio for purposes of qualifying for a new loan.
But notice that I said your mother-in-law must make the entire mortgage on her own, using her own funds. If you are helping her make the monthly payments, that will complicate the situation and you may have to claim some or all of those mortgage payments as a debt when you apply for a new loan.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206. Fax questions to Tytler at 425-339-3435 or e-mail him at economy@heraldnet.com.
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