A co-signer is a person who agrees to pay a borrower’s debt if he or she defaults on the loan. The person asked to cosign a loan usually has a good credit score and a lengthy credit history, which greatly improves the primary borrower’s odds of approval.
Recently a mortgage applicant called to do the right thing: Pre-qualify for a condo before placing a contract on it. What this applicant did not know is that the student loans he had co-signed for his son a few years prior had gone into default with 3-4 months of late payments prior to. The son did not have the money to pay on the loans and was eventually able to get both of the student loans deferred. The damage was already done. The father had no idea his credit was compromised and his credit score lowered.
Many people think that co-signing means if the first person cannot pay the obligation, then the co-signer will. That is true but there's more! The co-signer is equally liable as the signer. It is not just your credit score or income being used to obtain the loan. You are also liable for this debt and the more debt you have, the lower your credit score and other detrimental factors. You also cannot remove yourself as the co-signer. You are there for the long haul until the debt is paid in full. Truthfully, you may not know the end result of the payment history until it is beyond too late.
There have also been some success stories but less of them. The following is a few tips on trying to avoid co-signing:
1. Help your children when they are young to begin to understand credit and financial obligations (debt) and to live within their means. Teach them to save. A good foundation in finance will help to prevent having to co-sign later.
2. Help the person build their credit. Most co-signers need help because they have no credit or possibly bad credit. I added my son as an authorized user on two of my credit cards. I did NOT give him the credit card. In fact, I don't think he even knew he was an authorized user. I only added him for the purpose of helping him establish his own credit. When he was ready to buy his first used car with his own income, he had two trade lines showing on his credit report with a decent credit score. If someone has bad credit and asks you to co-sign, consider the risk carefully.
3. Look for other alternatives other than co-signing. Possibly buying a cheaper vehicle that fits the signer's budget or a less expensive college closer to home. If it is a vehicle purchase, renting an apartment or buying a house, it would be more advantageous to help put more money into the transaction than to co-sign
Ultimately, it’s your credit on the line. Always ask questions about the debt to which you will be obligating. Find out the terms and conditions of the loan and present questions to the signor as to how they intend to pay the debt if they lose their income or circumstances change. You’ve spent years building an excellent credit history, and it only takes a few skipped or missed payments to undo your hard work and reduce your ability to qualify for lower rates – or even get financing when you need it most.
by JoAnn Young, Real Estate and Mortgage Finance since 1996. 321-243-4917
