Co-signing for someone else can impact your ability to get approved for a mortgage because it expands your financial obligation. The co-signed loan becomes part of your overall debt load, increasing your debt-to-income ratio (DTI).
The lender looks at both your credit and the co-signer's credit to determine if you can get a loan. When they look at your application, lenders will also consider you and your co-signer's debt-to-income (DTI) ratio. Every lender has its own standards when it comes to what they consider an acceptable DTI.
It can increase your debt-to-income ratio.
Lenders look at your debt-to-income ratio when considering you for a new credit account. If you already have a high amount of debt, adding a co-signed loan could impact your own ability to qualify for additional credit.
Once you cosign a loan or credit card, it's likely to show up on your credit report. In fact, the only way the new credit wouldn't show up on your credit report is if the lender fails to report it. It's important to note that most lenders report loans and credit accounts to the credit bureaus.
Suppose your credit score is 619, and the loan you applied for requires a 620 score. Then, even if you add a co-signer with perfect credit and a higher score, the lender will deny the application because the 619 qualifying credit score is too low.
The minimum credit score needed for most mortgages is typically around 620. However, government-backed mortgages like Federal Housing Administration (FHA) loans typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs).
Normally, a cosigner will have to stay on the mortgage for a minimum of one year. From my experience, normally a cosigner will stay on a mortgage for several years. When the borrower is ready to have the cosigner removed, they contact the lender to then re-qualify without the cosigner.
Lenders can consider the credit scores of both borrowers when co-signing an auto loan. If you have a lower credit score, having a co-signer with a higher score could work in your favor. In terms of which credit-scoring model is used for approvals, that can vary by lender.
Each lender has its own criteria and process for removing cosigners, and some don't even allow it. So the best place to start is to contact your lender to find out your options. They may include: Co-signer release: An agreement to release the cosigner's liability after a certain number of payments are made.
Benefits of co-signing a loan
When someone has a thin credit history or is rebuilding their credit, having a co-signer with a good score and an established credit history is powerful. Not all personal loan lenders allow co-signers, so it's worth checking before you apply.
Co-signers also help prospective borrowers get a much lower interest rate on a loan than they could on their own. An ideal co-signer will likely have: A credit score of about 670 or higher, which is considered “good” by the two primary credit score analysts—FICO and VantageScore.
You need to have more income than the primary borrower to be a personal loan cosigner, in most cases, and loans from some lenders have minimum income requirements as low as $10,500.
Key takeaways. If the person you co-signed your loan with dies, it is important to keep up with your loan payments to avoid the risk of default. No matter whether the deceased was the co-signer or primary borrower, you will become the sole person responsible loan payments.
For example: Let's say you're credit score is 590, you're interest rate could be anywhere from 10-15% for your loan. If you add a co-signer with a credit score of 720, then you're interest rate could instead be anywhere from 5-7%.
A cosigner's good credit history helps reduce financial risk to the lender, which may help you qualify for a loan you might not otherwise get. Each auto lender has its own credit requirements, but typically a cosigner needs a credit score of 670 or more.
Although there might not be a required credit score, a cosigner typically will need credit in the very good or exceptional range—670 or better. A credit score in that range generally qualifies someone to be a cosigner, but each lender will have its own requirement.
Co-signing for someone else could affect you significantly in any future loans you may apply for. Lenders refer to this situation as someone having too much credit and is often used as a reason to deny a loan application. Once you sign as a co-signer, there's no turning back.
At the end of the day, while the idea of cosigning a loan sounds loving to those we are doing it for, God's Word reminds us time and time again in the book of Proverbs that this is an unwise way to manage our finances.
Co-borrowing is a relatively unique option for home buyers. The FHA will allow another borrower, who will not live on-site, to co-sign on an FHA home loan.
You can often remove a cosigner at any point during the loan period. Your loan paperwork might dictate specific terms, though. For example, some lenders require 24 months of on-time payments from the primary borrower before they'll consider releasing the cosigner.
The lender may require two years of on-time payments, for example. If that's the case, after the 24th consecutive month of payments, there'd be an opportunity to get the cosigner off the loan. Review your loan terms carefully to find out if you have cosigner release as an option.
To qualify for a conventional loan, you'll need a credit score of at least 620, though some lenders may choose to approve conventional mortgage applications only for borrowers with credit scores of 680 and up.
The required credit score to buy a $300K house typically ranges from 580 to 720 or higher, depending on the type of mortgage. For an FHA loan, a popular choice among first-time homebuyers for its lower down payment requirement, the minimum credit score is usually around 580.