I had a guy call me some time back to apply for a purchase home loan. He was a nice guy to talk to, but it became pretty obvious a few minutes into the conversation that his “niceness” had created some big financial headaches for him. He had strong financial qualifications for the loan – good job, good income, etc. – but unfortunately, he’d recently committed a major “oops” that pretty much disqualified him from getting a home loan.
So what was his “oops”? Well, he cosigned an auto loan for somebody. Amazingly to me, this somebody wasn’t his mom, wife, or son – it was a coworker. Wow, serious? I’ve never been too thrilled about the idea of cosigning anyway, but it would never occur to me to cosign for a coworker.
Predictably, the coworker failed to make the payments and the car ended up being repo’d by the lender. Now my client had an ugly blemish on his credit, low credit scores, and he couldn’t qualify to buy the home he wanted. Most tragic was that he had a high rate on his current loan and could have saved a ton of money with a refinance.
The lesson here? Think very, very carefully before cosigning. It can come back to burn you later.
Be Wary of Putting Your Credit In Somebody Else’s Hands
When you cosign, you’re putting your good credit rating into somebody else’s hands. You’re giving them the power to wreck your credit if they fail to make the payments on time. Even worse, the bank has the legal right to come after you for the debt even if the other person was supposed to make the payments.
And if you end up with damaged credit, you could have a tough time getting a good loan when you want one – just as my borrower discovered.
Even if the person you cosigned for actually keeps up with the payments, the cosigned debt could still create some headaches when you want to apply for a home loan. Mortgage underwriters will insist on including any cosigned payments in your debt-to-income ratio unless you can document with cancelled checks that the other person has been making the payments for the last 12 months. If you can’t document that and your debt-to-income ratio is too high to qualify, you won’t be able to get the loan.
Think Carefully Before You Cosign
I would advise thinking very carefully before you cosign and put your credit rating into the hands of somebody else. Bad credit can hang with you for a very long time and make it difficult to get a loan when you want one. And even if you can qualify with the bad credit, you’ll likely pay much more for the loan.