Exercise caution when a friend asks to co-sign a loan or mortgage agreement. You will become legally responsible if they default on payments and the lender can seize both wages and property as payment for missed debts.
Combining personal and financial relationships can strain any relationship, and cosigning adds your income and credit history to a borrower’s application, potentially increasing his or her chances of approval.
The Benefits
Helping someone you care about in need can be rewarding and fulfilling. From helping your kids buy their first car or reestablishing credit after an financial difficulty, cosigning can make it possible for them to secure what they require. Payments made on time will show up on both parties’ credit reports – increasing both parties’ scores.
One potential drawback of cosigning may be reduced ability to qualify for other credit, as this adds debt-to-income ratio that lenders consider when approving applications. Furthermore, should your borrower default on their debt, you will become responsible for repaying it and this could strain relationships further. You can safeguard yourself by requesting online account access for their mortgage statements and setting up notification from lenders immediately of missed payments as soon as they occur; additionally setting aside money should they fail to make their payments themselves.
The Risks
An obligation in your name makes you legally accountable, which could harm your credit scores and restrict future borrowing opportunities.
Lastly, if your friend falls behind on payments or defaults entirely, lenders or collectors could sue to recover the debt from both of you and that could significantly strain or even fracture your relationship.
Lenders often consider the credit score of applicants when making decisions to approve or deny mortgage applications. A high credit score can help borrowers qualify for better mortgage rates; an applicant with lower scores might require co-signers with better scores to help qualify.
Some home buying assistance programs require co-signers with strong credit histories as co-signers. Such programs can be found both state and locally and offer assistance such as down payment assistance, discount loans or tax breaks to make home ownership simpler for first time home buyers.
The Requirements
Co-signers typically need to possess high credit scores, clean credit reports and verifiable income in order to be considered suitable co-signers by lenders. Lenders also take into consideration both co-signer’s debt-to-income ratio as well as that of both borrower and co-signer when making decisions about loan approvals.
Before agreeing to co-sign for someone, it’s important to think through how it may alter your relationship. Since your credit will be tied directly to their loan payments and delinquency issues, any missed payments could cause irreparable harm to both of us – not to mention debt collectors potentially calling and even trying to take over our personal lives!
If you are considering cosigning for a friend or family member, make sure you request online access to view loan statements and payments made. Ask them also to notify you immediately if the borrower misses payments so that you can assist without risking your relationship. You could even consider contributing with a down payment instead to help get them approved for their loan or home purchase.
The Decision
Co-signing a loan or mortgage should be considered with great care. A co-signer assumes legal liability if the debt isn’t paid as agreed and may even face legal consequences should payments fail to come in on time, potentially leaving their credit score more damaged than before. It could take months or even years before your credit improves after defaulting on such a co-signed loan.
Before agreeing to co-sign a loan agreement, the primary borrower must discuss its impact and its ramifications for their financial wellbeing. They should then jointly review their loan contract so both parties are clear about its terms.
lenders evaluate borrowers based on their credit score, history and other information to assess their ability to repay a loan; this process is known as debt-to-income analysis or DTI for short. If homebuyer income doesn’t meet minimum lender requirements, a co-signer may be necessary in order to meet qualifying for mortgage financing; providing additional income can help balance out DTI ratio and help the borrower qualify for financing.
