What happens when a friend or family member – maybe one of your children – calls you and asks you to co-sign a loan for them? Typically that question will come from a family member – usually one of your children. It may be a school loan or a car loan – or maybe it’s for a mortgage. You need to decide whether or not you are comfortable with the decision – whether it’s yes or no. If you do decide to co-sign, you need to remember that you are also responsible for the payment and if your child or friend decides not to make the payment, you have to pay the loan back.
The first question should be why does the person need a co-signor – it may simply be lack of credit. I know when my daughter got her first credit card, I needed to co-sign. We did that with the understanding that I had access to the account and that when she could, my name would be taken off the account. If the person needs help due to lack of income or due to credit issues in the past, you may want to consider the request very carefully. If they can’t qualify due to lack of income, how are they going to make the payments going forward? If they have had credit issues in the past, what has changed? Will they have more issues going forward and still not be able to make the new payments?
Know how co-signing affects your credit. Your credit score will drop temporarily due to new credit – that happens anytime you open a new account. If the payments are late, it affects your credit just like it was your loan – it is your loan, you are also responsible for the payment. If you are looking at buying a new home or car, it will also affect your debt to income – you may not qualify for something you were planning to buy due to the extra debt. If the person you co-signed for files bankruptcy or lets the account go into collections, the creditor can come after you for the balance that is owed.
If you still decide to co-sign, make sure you set up arrangements with the person you co-sign for. With my daughter, I had access to her account and I could make sure the payment was always on time. If you are co-signing for someone, see if you can get access to the account or get copies of the statements. Talk to the person you are co-signing for and set up arrangements for you to get the collateral if they can’t make the payments – or figure out what will happen if they are delinquint.
If you co-sign a mortgage for someone, you need to know that the only way to get your name off that mortgage is for them to sell the house or refinance the loan. If a FHA mortgage is used, they may be able to assume the mortgage and take your name off that way. If the house goes into foreclosure, it will affect your credit for many years to come. It will stay on your credit report for up to 10 years.
Sometimes it’s very hard to say no to a child that needs your help, but sometimes that is the only answer. If you do decide to help, make sure the payments are made on time and that you have the ability to cover the payment if your child can’t make it. Understanding the potential risks can help you make a good decision and keep your finances and your relationships in good standing!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
