What to do if a co-owner wants to take a loan out against there share?

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What to do if a co-owner wants to take a loan out against there share?

My 2 siblings and I co-own (equal shares) of our deceased parents’ home. However, 1 of my siblings has recently fallen on some hard times; she lost her business and her own home. In desperation, this sibling wants to take out an equity loan on her share of the property. It’s a substantial amount but still under 50% of the equity in the house. Considering some of her recent decisions, I am worried that she will not keep up the payments. She claims that even should that even should this happen, I am not liable since it is solely a loan on her share so cannot affect me even though I must co-sign. The bank would simply sell the house and I would get my full market share. This seems implausible. Is it?

Asked on January 24, 2016 under Real Estate Law, Texas

Answers:

B.H.F., Member, Texas State Bar / FreeAdvice Contributing Attorney

Answered 5 years ago | Contributor

If you are a co-signor, then you have become co-liable.  When a bank forecloses on a loan, they are not concerned about making sure that co-owners or co-signors are made whole... they only care if they are made whole.  Many bank foreclosure sales end up being short sold below value...meaning that there is less residual or left over funds to make other persons whole.  So... if she takes out a loan on the property for $20K, the bank is only going to care about getting $20k out a sale... which means no or little funds left over to reimburse you and your brother for your risk. 
The other aspect you need keep in mind is that you are being required to co-sign.  Many co-signors think they won't be liable or it won't hurt their credit... unfortunately...if you're on the note your liable.  If she defaults on the loan, they will turn to you for payment.  If you fail to pay, then it will show up on your credit history because you are tied to the account.
Basically, this idea comes with two layers of risk... to your credit and the asset.
A better option would be for you and your brother to buy out your sister's share.  The advantage is that she gets the funds she needs, and you and your brother have preserved the house.  If neither you or your brother are really interested in keeping the house, a second option would be to simply sell the house and then divide the proceeds in accordance to your shares of ownership.  Again... your sister gets the needed funds, but your interest is protected and can be reinvested in something specific to your needs.  A third option is to request your sister to obtain a loan for the full value of the property and to buy you and your brother out of your shares of the property.  She would become the sole owner, but you and your brother would receive compensation now... which would be better than holding your breath at a foreclosure sale.
It's always hard to say 'no' to a loved one, but the fact that somone at the bank hasn't mentioned your liability or risks means that you should proceed with caution.  Talk to your brother and sister about some of these other options.  If the bank asks you to sign anything, have a real estate or consumer attorney look it over for you.  You never want to put your signature on any legally binding document for which you have reservations.


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