Co-signers often get hurt by loan process
If your credit history is bad and you spend money long before you get it, having someone co-sign your home loan is not going to solve your problems — unless they plan to move in with you.
Co-signers, or coborrowers, can help bring you up to the income needed to qualify for a loan, but requirements can be very specific depending on the type of loan. Usually the key word is “occupancy.”
“People are often mistaken that the co-borrowers’ credit will solve the credit problems for the person planning on living in the home,” said Mark Palmer, mortgage specialist banker with Absolute Loans. “If the person who is going to occupy the home has lousy credit, we don’t care how strong the co-borrowers’ credit is. The co-borrower will not make bad credit good.”
The days of finding a friend to co-sign for a loan at the neighborhood bank are long over. All persons who sign on the line are now deemed co-borrowers and are responsible for repaying the debt. Co-borrowing is a big commitment and people need to take it seriously.
Even when parents agree to be co-borrowers for their children, the folks need to understand that they are not off the hook until the loan is repaid.
I had some parents once who helped their kids by co-borrowing. The kids were late on a few payments and it showed up on the parents’ credit report a few years later when the parents wanted to buy a new home. While no hard data is available on the percentage of co-borrowers damaged by shouldering a friend’s or family member’s mortgage debt, we get a general view from other loans.
“About one in three people who co-signed a loan said it hurt their credit score,” said Matt Schulz, creditcards.com senior analyst of auto loans, student loans, personal loans and credit cards. Schulz said his recent survey confirmed that many people who co-sign with the best of intentions, fail to realize the lasting consequences they’ll face if things go wrong and payments are missed.
Schulz said his study revealed that nearly four in 10 people get stuck paying all or part of the bill.
“When you co-sign, you’ve got about a 40 percent chance of losing money,” Schulz said, “and about a 25 percent chance of damaging the relationship with the person that you co-signed with — so that makes co-signing a really risky proposition.”
Most mortgage loans are sold in the secondary market where Fannie Mae and Freddie Mac are the two biggest players. Both require that the co-borrower occupy the home if the down payment is less than 10 percent of the purchase price. The coborrower does not have to occupy the property if the down payment is more than 10 percent, provided that the co-borrower does not have a vested interest in the transaction (real estate agent, developer, etc.).
Cosigned loans insured by the Federal Housing Administration (FHA) can be for up to 97 percent of the purchase price of a property as long as the co-borrower is a relative of the borrower-occupant. If the co-borrower does not occupy the house and is not a relative of the borrower-occupant, FHA requires a 25 percent down payment.
FHA will consider allowing a person with a longstanding family relationship to act in the role of a family member in specific situations. Loans guaranteed by the Department of Veteran Affairs are even more stringent with co-borrowers. Since VA loans are based on the veteran’s “entitlement,” only the income provided by the borrower and his/ her spouse will be considered, or the income provided by another veteran occupying the home.
Some lenders are more lenient than others. There are a lot of couples who are not married looking for homes and loans. Some have come out of previous situations that have put them in a tough financial spot. Some lenders look at all parties to the loan as one entity, so some pluses can offset some minuses.
What consumers sometimes forget is that lenders need them as much as they need lenders. If a bank doesn’t make loans, it will not make money. And lenders do not want to get properties back through foreclosure so they try to insure their bets by making everybody signing for the loan responsible.
If you are going to lend a helpful hand in a home loan, be prepared to follow up and make sure all payments are made on time. And if it is your intention to get out of the deal at a certain time or when the home appreciates to a certain level, have the borrower-occupant refinance the loan on his own. Just remember that if you co-sign, you can’t plan to walk away until your name is clear.
Even when parents agree to be co-borrowers for their children, the folks need to understand that they are not off the hook until the loan is repaid.