Learn all about cosigning, what does it mean to cosign a loan application, should you do it and how you can get out of it.
Cosigning is the process by which another person shares the responsibility for paying off somebody else’s debt obligation in the event that the primary party defaults on the payment.
The economic crisis of the year 2007-2008 battered the credit scores of many borrowers. At the same time the requirement by lenders regarding the credit rating increased and became more strict.
The result was that many borrowers required and needed someone with a good credit rating to sign on their loan application in order to be qualified. This person was to be someone who is willing to share the responsibility and expressed his intent to come through with the payment if the primary party went into default. However, finding cosigners for loan applications is not the easiest thing. In fact, mortgage loans are the kind where you will see the least amount of cosigners.
Cosigning provides limited help on a mortgage loan application
As already mentioned cosigners are rare on a home loan application. Even if the borrower who cannot qualify for a home loan on his own account finds a person to cosign the lender will still look at the credit rating of the person who is applying for the loan. They will not use the credit of the cosigner. While the cosigner cannot improve the credit score used to price the loan the cosigner’s income may be added to the borrowers income in determining the size of the loan for which the borrower qualifies.
On FHA loans hundred percent of the cosigners income can be used to raise the qualifying loan amount up to the FHA loan limit. However the cosigner’s debt is also added in determining the qualifying loan amount. This means a cosigners with a large debt could add little or nothing to the qualifying loan amount.
On conventional loans which are essentially non-FHA and non-VA loans, non-occupant cosigners are not allowed at all. Those that do allow it limit the incremental income to 50% of the cosigner’s income but they include hundred percent of the cosigner’s debt. As a result there are not many cosigners on conventional loans.
The reasons why cosigners are not there on mortgage loans is that this is a very serious responsibility to undertake and apart from somebody like a parent who is trying to help out their child with the first loan, no one else will be ready to take on this burden.
It has been known for cosigners to suffer and have their lives seriously disrupted if the primary borrower missed a payment or stopped making payments all together. Usually people realize all too late that they should not have cosigned on a loan application.
It should be clearly understood that the lender has all rights to collect from the cosigner if the primary party defaults on a payment. In fact the lender can straightaway try to recover the money from the cosigner without trying to recover from the primary party as both are legally responsible. This is prohibited in some states where the lender is first supposed to try to recover the money from the primary borrower. Check this law in your state with an attorney if you are considering becoming a cosigner for someone.
Cosigning for Someone You Know Extremely Well
Cosigning does not always necessarily have to be a negative experience for the person. Sometimes a person cosigns for another person because they have information about the person that the lender does not. Parents cosigning for the children to help them establish their first credit is common.
Many of these situations have a happy ending. However, it must be kept in consideration there are also circumstances in life which could prevent the primary party to be unable to pay on the loan no matter how noble the intent or character of the person be. Such circumstances include but are not limited to sudden and serious illness or job loss. In such a case the cosigner will have to take responsibility for making the payment on the loan. Such a risk with cosigning on a loan application is something that cannot be avoided.
Cosigning for Somebody Who Is Not Responsible
This is the single biggest mistake that a person can make when considering to cosign for a person. Usually people only cosign for a person whom they know extremely well and whom they have great faith in.
They also cosign for the reason that the person could be getting denied for a loan that has nothing to do with the financial situation of that person. Just because a person has a poor credit rating or a lack of credit history doesn’t mean the person does not have the resources for paying off the loan.
If you know a person and you know the person to be responsible who will follow through on his commitments then cosigning could be an all right thing to do. In fact most of the cosigning instance between family such as parents and children have an happy ending. However, it also stands that just because a person has the resources to pay the loan does not mean that he will.
The biggest mistake that you can make is when you end up cosigning for somebody who you did not know that well and about whom you had no information regarding his/her capacity or the willingness to repay the loan.
If you end up cosigning because you get taken up by the distress of the person or the persuasiveness of the person without really contemplating the practicality of the whole situation then you could be in for trouble. In fact most of the disasters that happen from having cosigned on loan application happens for these reasons. People cosign when there is no evidence to suggest that the borrower is reliable and has the resources to repay the loan in the future.
People get taken in by strong feelings of obligation to help relative, friend or a lover. The guilt of refusing along with the fear that the refusal would impact a relationship overwhelms better judgment. As everyone will know it is hard to say no to someone near and dear. But if you have reason to suspect that the cosigning is not a good idea then go through with your instinct. Because if the person does happen to default it will affect the relationship anyway.
If you’re not fully confident that absent unusual circumstances the borrower will meet his or her loan obligations you should say a firm and definite no to cosigning a loan application. If the person chooses to end the relationship because of this then there is nothing you can do about it.
But saying yes to such a person means jeopardizing your financial security and that of your family is really not worth the risk
How Can You Get out of a Cosigning Obligation
The truth is once you have co-signed on a loan application you cannot be taken off it till the loan is repaid by you or by the borrower. If the primary borrower has defaulted then the lender has no reason to take you off the list because he has you there for this very reason in the first place. The lender needed you to cosign to safeguard himself against the very eventuality that the primary borrower will default on the payment. Now he has you to recover the loan from. So you have no option but to either pay off the debt to end the obligation or get the primary borrower to pay it off. Apart from that there is nothing much you can.
Cosigning Can Affect Your Qualification for Loan
Being a cosigner on somebody else’s loan or mortgage can impact your own ability to get a loan yourself. This is because the other person’s loan will show as an existing liability on your credit report. Since you are already responsible to pay off one mortgage loan, your ability to take on a second mortgage loan will be tremendously hindered in the eyes of the lender.
However, if the primary party has been making regular payments on the existing loan for a certain period of time, you may be able to provide documentation to the lender proving this fact. In this case the lender to whom you’re applying for a loan yourself may be willing to overlook your current obligation. It will not remove your obligation from the loan contract from the other party or from your credit file but with an understanding lender you might be able to get a mortgage of your own and qualify for a loan amount of the sum that you want.
Cosigning for the Lease Contract
The only difference between cosigning for a house purchase and a lease is that your obligation is likely to be shorter.