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?