Here’s what you need to know before you decide to add your name to that dotted line.
First, what does co-signing really mean?
At the bottom line, it means you are accepting full responsibility for making the loan payments. You are adding the security of your income and credit history to the transaction, along with the “occupying borrower.”
When you agree to co-sign, your income, credit history, assets, and debts will be scrutinized by the lender, just as if you were the primary borrower. They’re attempting to verify that you have the ability to take over making payments if the primary borrower defaults.
Note that your high credit scores won’t guarantee loan acceptance if the person you are attempting to help has low scores. Credit scores are, after all, a reflection of a person’s track record of handling credit.
Co-signing can reduce your own ability to obtain a loan.
Remember that when you co-sign a note, that debt is added to your own debt with regard to your debt-to-income ratios. That means that while you might show the ability to make new mortgage payments of your own if only your own personal debt was considered, your lender has to assume that you are already making the payments on the note you co-signed.
Co-signing is risky.
If something happens to affect the primary borrower’s financial health, you must either take over making the payments or see your own credit destroyed. Even if the borrower misses just one payment, then catches up and resumes making on-time payments, your credit score will be affected. According to FICO, someone with a score of 780 or more would see a crop of 90 to 100 points in response to a missed payment. Late payments have a similar effect.
In a survey done in 2016, 38% of co-signers reported having to pay mortgage loan or credit card bills, while 28% reported suffering a reduction in credit scores because the primary borrower paid late or not at all. 26% said co-signing resulted in a damaged relationship with their friend or family member.
How can you protect yourself?
You love the person who asked you to co-sign. You want to help, but can you trust that person to meet their obligations? Past behavior is a good indicator of future performance, so first have a look at his or her credit report.
If there are late payments or defaults, is there a very good reason why? If they truly can’t handle money, you won’t be doing them any favors by helping them get further in debt.
If the problem is lack of income, can you see that their income is likely to rise immediately, or will the be stretching themselves too thin? Again, you might do them a favor by saying no.
If you decide to go ahead…
Make sure that you will be shown as a co-owner as well as a co-borrower. This will give you a measure of control, should it be necessary to sell the property.
Next, set up email or text alerts to tell you when payments are due and when they’ve been made. Since mortgage payments generally have a 15-day grace period for payment, this gives you the opportunity to step in and make the payments before a late charge is incurred and the late payment is added to your credit report.
Make sure the person for whom you’re co-signing knows how to reach you and knows that they MUST contact you immediately if it appears that they won’t be able to make a payment on time.
Do you have more questions? Call Homewood Mortgage, the Mike Clover Group. We’ll be glad to provide the answers.
Call us today at 800-223-7409