What is a cosigner?
A co-signer is the key to getting a loan when you have a low credit score or short credit history.
If you find yourself looking for a loan but not meeting the credit requirements, bringing a co-signer on board is one way to help you meet any credit requirements. Lenders can consider a co-signer’s credit history if a borrower’s does not meet the minimum requirements. If the primary borrower is unable to keep up with payments, lenders can turn to the co-signer for payment.
Co-signing can be beneficial for borrowers when applying for a loan as well as co-signers during the length of the loan. Are you ready to start seeing the advantages of co-signing a loan? Apply now!
When do you need a co-signer?
The most common use of a co-signer isn’t for loans. It’s more typical for those who are renting.
As young people look for their first apartments, they might run into trouble when landlords check their credit histories. Without much of a credit history to go on, landlords could assume the renters lack the experience needed to manage their finances and meet monthly rent.
When this is the case, parents can step in as co-signers. This eases the landlord’s mind as it means that if the renter is unable to make a payment for the month, the parents will step in with the necessary funds or risk damage to their own credit scores.
Loans with a co-signer typically follow the same process as loans without a co-signer. Lenders will provide you with the terms of your loan, including interest rates and your monthly payment schedule, then both you and your co-signer will have to sign the loan agreement. As the primary borrower, you will receive the full amount of your loan.
Co-signers will not have access to any of the loan’s funds and won’t be on the hook for regular monthly payments. Co-signers are only responsible for payments when the primary borrower is not able to make them.
Co-signer vs. co-borrower
Co-signers help borrowers pass credit checks and will be contacted in the case of defaulted payments. Co-borrowers will do the same but will have access to the loan funds.
A co-borrower offers the same benefits as a co-signer. Co-borrowers with strong credit scores boost the chances of getting your application approved and could help get favorable interest rates on the loan.
Because co-borrowers are also receiving the principal of the loan, co-borrowers will be responsible for making regular payments along with the primary borrower.
Pros and cons of having a co-signer
Co-signing a loan can be beneficial but does come with its own worries. Here are a few of the pros and cons to consider when co-signing.
Pros
- Co-signing a loan improves the chances of getting a loan approved and could even come with lower interest rates for the borrowers.
- When the primary borrower has a strong credit score and history or pays on schedule, co-signers can build up their credit scores and improve their own credit histories.
- A co-signer helps someone they care about purchase a home and achieve their financial goals.
Cons
- The biggest worry of any co-signer is that they will be responsible for paying back the loan if the primary borrower defaults on payment.
- A co-signer’s credit score can be lowered if regular payments are not made by the borrower.
- The debt-to-income (DTI) ratio of a co-signer will increase, potentially making it harder for them to get a loan of their own.
- Relationships between a co-signer and primary borrower can be affected if the loan defaults.
What to consider when co-signing a loan
If you are ever asked to co-sign a loan, here are a few things you may want to know or consider:
- Understand the consequences you might face if the primary borrower can’t keep up with payments. You will have to make those missed payments, and your credit score could take a hit.
- Don’t be blindsided if a lender contacts you for payment. In the event of any missed payments, make sure the creditor knows to inform you as soon as possible and not just when you need to pay.
- You might need to put up collateral. Some co-signers will be asked to put up personal assets as collateral to improve the chances of a loan being approved. If payments are missed, your assets could be sold to cover the amount.
How do I get a mortgage without a co-signer?
A co-signer isn’t a requirement for a mortgage. Even if your credit score isn’t high enough for a conventional loan, there are other options.
If your credit score is under what is required for a conventional loan and you want to avoid needing a co-signer, consider an FHA loan. Some lenders will consider FHA loans for borrowers with credit scores as low as 500. The VA doesn’t set a minimum credit score for borrowers who qualify for their loan programs, but your lender might.
and talk with a loan expert to find out what your options are and if you might need a co-signer on your mortgage.
