If you have stable income and credit you’ve probably been approached by friends, family, and/or Girlfriends and Boyfriends to co-sign for a loan. Lenders look for good credit and income to evaluate the potential risk of applicants and those that pose and elevated risk need others to help reduce that risk. It’s important to know what can happen if you decide to co-sign before you sign on the dotted line.
A co-signer accepts joint responsibility for another individual’s debt. Both parties are responsible for the making sure the debts are paid. Credit of both parties involved may be positively or adversely affected depending on the payment history.
Understanding the risk
Credit scores are based on risk and those who can’t qualify for a loan may have limited/no credit, bad credit, too much credit, or not enough income. All of the reasons listed should raise red flags for any lender and potential co-signer.
Mortgages consider co-signed loans in the DTI (Debt to income Ratio)
Mortgages treat co-signed loans like any other loan, even when it’s someone else’s. The only way to remove the liability from consideration is if you can prove someone else has been making the payments for 12 months. This can prove difficult if the account is paid in cash or unverifiable.
Questions to ask yourself before co-signing:
- Are you willing to assume the debt if the co-borrower wasn’t able/willing to pay?
- Have you looked at the co-signer’s credit to evaluate their risk?
- Are you willing to trust this person to make the payments?
- Are you willing to jeopardize home ownership?
- Are they making a rash decision they aren’t financially prepared for?
Things you can do to safely co-sign (If you must)
- Explain expectations to co-signer
- Require all payments be auto paid through bank – so that all payments are made on time and can be verified.
- Make sure your number and email are attached to the account so you may be notified in case of account issues.
- Require the co-signer to allow you to evaluate and inspect their credit history.
- Avoid co-signing for anyone that’s not part of your immediate family. Avoid boyfriends, girlfriends, friends, etc.