Should I Cosign A Loan
When considering qualifying for a loan, one topic that often comes up is getting a cosigner. For an applicant, a cosigner can mean qualifying for more money, compensating for difficult credit situations, and strengthening a loan file. Some perks of having a cosigner include more borrowing power, potentially lower PMI rates, and access to loan products otherwise unavailable (for example, if a cosigner would allow a borrower to qualify for a conventional loan when otherwise they may need access to a higher rate nonQM product)
Often, though, cosigners are unsure of the risks associated with putting their name on the dotted line to help family or a friend. A cosigner, for all intents & purposes, is equally responsible for a loan as a primary borrower. Further, many lending institutions will consider debts that have been cosigned for as personal debts to be counted against an applicant. That means that your kids student loans and anything you've cosigned for to help someone else out will be held against you when you apply for your own loans. And if you want/need to exclude those debts from your profile, you may have to jump through a lot of hoops for that to happen.
Can you exclude the debt? In some cases. When getting a mortgage for example, if we can show a consistent payment history with payments made by someone else for an extended period of time, we can often exclude the debt from our borrower's profile. But that papertrail must be lengthy, and consistent, for it to work.
Another thing to consider is the credit risk. Cosigners often aren't provided the same information each and every month about payments due, and therefore, if a payment is missed, it may be too late and damage could be done to credit. Just a small drop in credit score can result in frozen credit lines, higher interest rates, and all sorts of other unpleasantries that most people want nothing to do with. However, this is a very real risk of cosigning.
An alternative that works for many is that instead of cosigning, a potential cosigner can take out a loan in their name. That way, payments are 100% in their control, and the person that needed the cosigner can be a cosigner themselves. This is a safer way to manage the situation, and avoids the potential credit risk with more control.
Do I sound doom & gloom on cosigners? I'm not. In fact, having a cosigner was the only thing that allowed me to attend college. I came from a family without a lot of money, and being the first person in my family to attend college, we knew very little about scholarships, or how to apply for them. Instead, I relied on student loans that I was able to get with the help of a cosigner. I was blessed to have a cosigner, but it wasn't without headaches. Even after YEARS of on time payments, the lender refused to remove the cosigner from his obligation, and it had a role in his own personal finances when he applied for loans. While it worked out in the end, it was a bit of a headache, but I was thankful for the risk he took & trust placed in me, and fulfilled my obligation by paying off my loan in full early.
Cosigners can be a godsend for someone with a limited credit history in need of an opportunity, but there's a lot of thought that should go into signing on the dotted line. Want to learn more about some things to consider when cosigning? Our friends at Heartland Credit Restoration know their stuff, and offered these words of wisdom:
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