Co-Signing Explained

Posted on March 01 By MLP Lending Guide

When family members or close friends have financial problems, it is natural to want to help them. This is especially true if you are in a better economic situation than they are and have the means to help. In these cases, individuals are often asked to "co-sign" on a loan or mortgage. When an individual has bad credit, a lender may require a co-signer with good credit. In another scenario, an individual may wish to get a co-signer in order to obtain a larger loan or a mortgage for a more expensive house. In both cases, the lender needs a co-signer in case the borrower can no longer pay the loan. If the borrower can not pay, the co-signer will be forced to repay the loan.

Few individuals would agree to co-sign a loan if they believed they would eventually have to take over the payments. Yet many co-signers are often shocked to find that they are legally obligated to repay the loan if the borrower can no longer make payments. Even if you are taken off of the deed to the house, you will still be obligated to repay the loan. Some real estate agents will claim that after a year of good payment the co-signer can be removed, but this is also rarely true. The only way for a co-signers obligation to be removed is if the loan is repaid in full or if the lender agrees to take the co-signer off. The latter is very unlikely, so don't expect it to happen under any circumstances.

Additionally, co-signing a loan or mortgage means that it will show up as outstanding debt on your credit report. This could mean that it is more difficult for the co-signer to obtain their own mortgage. Furthermore, be aware that co-signing a loan to help out a friend or relative does not necessarily mean that they will get the loan as if they had your credit score. Lenders look at the lower of two credit scores if there is a co-signer. Be aware of all of these factors when asked to co-sign a loan. Be sure to consider the possibility that your friend or relative may not be able to make payments in the future. Could you handle that extra burden?

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9 Responses to "Co-Signing Explained"
  1. alternatives to reverse mortgage 13, Nov, 2011

    Normally I do not learn post on blogs, however I would like to say that this write-up very pressured me to take a look at and do it! Your writing style has been amazed me. Thank you, quite nice article.

  2. Mick canin 22, Oct, 2011

    Banks are strict to a point of stupidity. I'm trying to obtain a loan for a house that I can pay for upfront (I have excellent credit). Instead of using all of my cash and liquid assets, I'm trying to get a small loan 40% of the value (60% downpayment). Anyway, because my income isn't big enough, they won't approve the loan even though the loan amount I'm looking for represents only a third of my assets. So therefore, bottom line: job now is more important than the full capacity to pay off the loan. That's why America has so many problems. . .

  3. Ron Stone 22, May, 2011

    Good advice. I was pressured into co-signing a business loan on a family business that I was an absentee owner. Bad decision. The family member running the business ran the business into the ground and then filed bankruptcy. Bad news for me. Lesson learned? Just don't do it. You may think you're doing someone a favor and would feel guilty if you turned them down but in many cases long term it can hurt a relationship more to co-sign than turn them down.

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  5. cedar park mortgage 25, Apr, 2011

    Banks have to be strict, but the best way to overcome that is show up with a solid business plan, that is key. You can also try smaller credit unions if you find traditional banks not wanting to lend.

  6. monica 06, Apr, 2011

    I am new to this business but my aunt 85 wants to co-sign with me. What happens when she passes. Is she still on the mortgage?? Any advice is appreciated. thank you thank you

  7. Beth 01, Jan, 2011

    It's nice to read a good article. I enjoy many of the blog posts on your website.

  8. Snabbt Lån 21, Jun, 2010

    Why are the banks so strict when it comes to paying loans? When one is borrowing the loan he/she knows how he is going to repay it. After the entire bank once it agrees to give out loan don�t see why they should be harsh when claiming it!

  9. Russ Cokel 30, Mar, 2010

    A long-time friend of mine approached me three years ago with a business plan that he believed would really make a kill but the huge impediment was capital. We approached a local bank that approved our loan application and now the business has grown phenomenally.


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