If you are planning on buying a home with a co-signer, or trying to refinance with a co-signer already on your loan, we have tips and information on how to go about this situation. Co-signing can help a person get approved for a mortgage to purchase a home, but not without danger zones and risk for the co-signer. If you are asking a person to co-sign a loan for you, you will want to understand the trust they have in you if they accept your offer, and the responsibility you are to show for their name being presented on your loan.
Getting someone to co-sign a loan for you takes responsibility and trust, but if you can get someone to co-sign for you, it will alleviate a lot of variables that you would not be able to overcome alone with mediocre credit. First off, a common misconception is that a lender takes the credit of the co-signer. This is not a true statement. The lender uses the credit of the main borrower to qualify for an initial loan. With the credit of the co-signer, it allows the main borrower to get a larger loan than they would be able to alone. A lender would not look at bad credit of the main borrower combined with good credit of a co-signer and assume that there will be average credit and responsibility between them.
The major downside of a Co-Signing loan is the risk it places on the co-signer. Some co-signers are left in the dark when their borrower stops paying. Whether it is someone personal you know, or you took a larger risk at someone you didn’t know in exchange for an interest payment, you may be left uniformed, and with your credit at risk if you choose to not pay.
The best way to stay away from this risk is just to say no. It is your financial security that’s risk free because of your hard work. If you decide to take the risk and co-sign a loan, make sure you follow a few specific rules. First off, it is suggested to only co-sign a loan if you know the main borrower personally. That way, you are able to have a grasp on where their plan is with the loan the entire time. Next, you need to make sure the borrower is reliable. If you can rely on them, even when their credit is down and they are not able to continue paying, you will at least receive notice. They can inform you in advance so that you can help get them through their gaps in payments to salvage your credit. Lastly, some co-signers prefer to make the payments themselves to the lender. They would first receive the monthly payment from the main borrower and then pay off the lender. The advantage of this, is that it gives you a notice every month to make sure there is no financial problem before the payment is due. If there is a financial problem, you will have time to pay it and recover from the situation yourself before damaging your credit.
The best advice to you before you cosign for someone, is to make sure you can really trust that person. Don’t let the guilt of refusing to cosign eat you up, you’ll be way more upset if you cosign for a person and they destroy your credit.
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