Does cosigning for a loan affect my ability to obtain a mortgage?
August 6, 2011 7:09 AM   Subscribe

I have been asked to cosign for a rather substantial loan by a family member. I am willing to help out but need to know how cosigning might affect my ability to get a mortgage in the near future. Would the amount of the cosigned loan subtract from the amount of my potential mortgage eligibility? Would it even show up on a credit check?
posted by txmon to Work & Money (27 answers total) 4 users marked this as a favorite
Yes, to both counts. You are as much liable for the loan as the other person. Don't do it, because their non-payment will affect your credit negatively.

If they're having to find someone to co-sign, they already have shown that they were not responsible with their credit before.
posted by chrisfromthelc at 7:14 AM on August 6, 2011 [10 favorites]

Generally if this individual's credit is such that a loan can not be had on its own merits then you may not be doing the person a favor in the long run. Many of my current problems can be directly traced to allowing me to borrow over my earnings.

I'd only sign if you are willing to assume payments without malice, in which case I would make a gift of said money (not a loan).
posted by cjorgensen at 7:15 AM on August 6, 2011 [9 favorites]

I don't think it is a 1:1 relationship between the size of the cosigned loan and the size of the mortgage you could qualify for. The cosigned loan will affect your overall creditworthiness, in the sense that mortgage lenders are going to evaluate how much debt you have now versus your income. The credit check that the lender performs to allow you to cosign will appear on your credit report - I don't know if the actual loan will. That's a good question for the lender.

I would reevaluate cosigning this loan, though. If the person cannot get a loan on their own credit, a "substantial" loan is probably going to cause them problems down the line. The only loan I would consider cosigning for a family member would be a college loan for my child, and only then if I absolutely could not just front the money needed.

On preview, what they said.
posted by jeoc at 7:17 AM on August 6, 2011

Someone on MeFi once said that you should only cosign for a loan that you're 100% sure you'd have no problem paying back yourself.
posted by k8t at 7:23 AM on August 6, 2011 [11 favorites]

I'm pretty sure cosigning a loan will have a direct one to one negative effect on your ability to get a mortgage. This will probably be in terms of monthly payments. Your lender will assume that you'll have to make all the payments for the cosigned loan.
posted by jefftang at 7:25 AM on August 6, 2011

To pick up on what k8t and jefftang said, not only your lender but you yourself should assume that you'll have to make all the payments for the cosigned loan. Your credit will likely be affected if the family member falls behind on payments, plus you'd be on the hook for the payments, late fees, etc.
posted by tangaroo at 7:46 AM on August 6, 2011 [1 favorite]

I wouldn't cosign for anyone unless I was so financially & personally established that I would not be taking out any loans in the near term myself. When I needed a cosigner for my very first big-ticket loan, because I had no credit history myself, I asked my parents. It was ok, because they knew I was responsible with money AND they were not going to buy anything like a house or car in the next three years, so the little credit ding for them made no real difference.

It's not fair of your relative to ask you to cosign if they know you're planning to get a mortgage soon.
posted by philokalia at 8:02 AM on August 6, 2011

AVOID DOING THIS IF AT ALL POSSIBLE. I cannot stress this enough. I've seen so many well-meaning people want to help out an equally well-meaning (usually) family member or friend by signing for them, and every. single. time. the person defaults and sticks the cosigner with the bill. Often, the cosigner doesn't know about the default until it's already happened and on his credit report. It's cost my in-laws a huge portion of their retirement, it cost a friend of mine an apartment and credit card when he himself was really in need of every break he could get.

Usually people tend to say "I'll just cosign, I already said it would, IT WON'T HAPPEN TO ME." It will. It really will. I don't know one person who has had a cosigning situation end well, and I've held in a lot of "I frickin' told you so" and tried to help people out of a terrible quagmire.
posted by kpht at 8:05 AM on August 6, 2011 [8 favorites]

"I already said I would", rather.

What I also meant to add in there is that usually the person needing the cosigner for their loan really is well-meaning. They just had some bad decisions or bad times, they really need *this* loan to get back on top, they're otherwise responsible, they would never dream of screwing you over, etc.

But when it comes down to it, things happen, and they may not *mean* to not be able to afford the loan repayment, but they can't, and then sometimes they're embarrassed and don't want to tell you, they want to try to hide it or take care of it on their own, and then you go try to get a car and HEY YOU'RE IN DEFAULT WTF?!
posted by kpht at 8:13 AM on August 6, 2011

Don't do it. The mere fact that they need a cosigner is an indication that your family member is not living within their means. This means they are more likely to default and leave you holding the bag. You are taking on massive risk with no benefit.
posted by grouse at 8:36 AM on August 6, 2011

"unable to qualify for the loan without a co-signer" does not necessarily mean the person has bad credit or will default. It might be a young adult without any credit who cannot qualify. It may be someone with a source of income that doesn't count (my additional teaching income--because it was not guaranteed each semester--was not counted by my credit union when it qualified me for a mortgage, although other lenders did include it). It might mean someone with a terrible credit history. Maybe that person has learned the lesson and maybe not.

That aside, co-signing a loan makes you responsible for the entire loan, which impacts your credit and will affect your ability to qualify for later loans (such as a mortgage). It's possible the loan can be renegotiated and you could be released before it's paid off; it's possible the person "really" responsible for the debt will default and you'll have to pay it or suffer the consequences. It's possible you'll both just stay on the loan for the years it takes your relative to pay it off, at which point you're both released from it. As long as your name is on the loan, it is a debt obligation figured into your credit-worthiness, and the terms of your arrangement with your relative don't matter in that calculus; only the terms of the loan do.

The universal opinion in metafilter is always "never loan money to a friend or family member that you're not comfortable never getting back" and the universal opinion in metafilter is always that co-signing a loan or credit card for a friend or family member is always a bad idea. In my experience, I have never been screwed by a family member in a substantial loan or co-signing situation. You know better than we do whether it's likely the person will manage their obligations poorly and leave you on the hook--but yes, co-signing a loan is not substantially different than signing a loan, in terms of your credit rating and your obligations to the payments under the loan.
posted by crush-onastick at 8:45 AM on August 6, 2011 [3 favorites]

For my first car loan when I was in my early 20s, my dad offered to co-sign. He was actually super proud when it turned out I qualified on my own. But I don't think co-signing is a great idea except in extenuating circumstances like this: someone close to you can't get a loan because they don't have enough credit (which is different from having bad credit); there's an emergency of some kind.

If you can't afford to take on this loan yourself, don't do it.
posted by bluedaisy at 9:09 AM on August 6, 2011 [2 favorites]

I knew of one example where a co-sign situation works out; that is when 4 immigrant families co-sign to buy a house where they all live. It works out in this situation, though they are just friends; but I would not recommend this for anyone. If you do cosign a loan, you should find out as much about the credit history and income history of your cosigner. You are effectively guarantee a loan for the bank, ie, you are the private mortgage insurer for your relative. Typical PMI company are paid 1.5%-3.5% of the monthly payment for their trouble (and taking on risk). If they qualify for PMI, your situation is equivalent to sending them a check every month for the PMI. If they don't qualify for PMI, perhaps you should consider why others businesses won't work with your relative... and what else do you know about your relative that companies don't.
posted by curiousZ at 9:23 AM on August 6, 2011

Not sure how much the loan is for, but if you were me, and you're not, I would offer to GIVE them a few thousand dollars or whatever amount you can afford to lose and tell them it is a gift, but you cannot co-sign because you plan on taking a mortgage or some other loan yourself in the near future. That way you "helped" your relative yet are not taking any risk beyond what you laid out.
posted by AugustWest at 9:26 AM on August 6, 2011 [2 favorites]

I think you should google things like "cosigning dangers", and "cosigning horror stories". It is usually a helpful family member that gets totally screwed, sometimes by maliciousness, but more often by apathy or poor financial planning. Better to hand over every penny you have than to tie yourself legally to someone else for years. They might not mind missing payments occasionally and you WILL mind them dinging your credit. Do you want to have to watch over them for years? Just don't do it! Rather give them your car or whole bank account outright, it will hurt less in the long run.
posted by meepmeow at 9:59 AM on August 6, 2011 [1 favorite]

Fwiw the Bible teaches against cosigning...
this may not matter to you either eat but I thought I'd throw it out there.
posted by St. Alia of the Bunnies at 10:27 AM on August 6, 2011

*way*....darn texting....
posted by St. Alia of the Bunnies at 10:28 AM on August 6, 2011

Don't do it! My best friend had his credit ruined when he cosigned on his sister's mortgage. She defaulted, didn't tell him, and now his credit is in the crapper.
posted by smirkette at 10:38 AM on August 6, 2011

Unless it's your kid who has no prior credit history, and this is for college, don't do it. I also know people who have been burned by family members. I wonder if it's a psychological thing, the borrower feels they have a safety net in the cosigner, so isn't as motivated to pay it back themselves.
posted by desjardins at 10:46 AM on August 6, 2011

Unless you feel like supporting the loan on your own don't. Perhaps you could just give this relative the money they need with the expectation that they will never give it back.
posted by ptm at 11:00 AM on August 6, 2011

Just tell the family member that you are planning to get a mortgage, and this loan would show up on your credit report. We did this exact thing, because it's the truth. It definitely shows up on your report, and you said a substantial loan. It could exclude you from even getting a mortgage, or raise your interest rate if you even qualify after cosigning.
posted by annsunny at 11:44 AM on August 6, 2011 [1 favorite]

And, not to be morbid or anything, but people do die unexpectedly, even when they take out co-signed loans, which means for the survivor....
posted by 5Q7 at 1:10 PM on August 6, 2011

I'll have to join the "don't do it" chorus: yes it impacts your credit-worthiness; yes it impacts your ability to take out a (large-enough) mortgage of your own; and oh hell yes you WILL be on the hook for the whole thing if the other person fails to pay, which leads to hell yes it would reflect --- badly! --- on YOUR credit rating.

If you insist on helping them: can you just give this person a straight loan or even a gift? That way, there's no risk to your credit rating.
posted by easily confused at 1:51 PM on August 6, 2011

p.s. --- I speak from experience: I co-signed for a car for my sister after her divorce; she made the first two payments, then stopped. Fortunately for my credit rating, I caught it in time; UNfortunately, that meant I got to make all the payments for her car --- meanwhile, I was driving an ancient rustbucket, because all my money was paying for her brandnew shiny car...... bitter? me? now why would you think THAT???
posted by easily confused at 1:57 PM on August 6, 2011

Umm. I might do this but only under very specific circumstances. I would require that the person provide an income statement, and a full household budget including all income, outgoings and debt repayments. I'd need to know that they really can make the payments. (That's what I'd do with my siblings or parents, so I don't think it's crazy intrusive.)

But very likely, it doesn't matter - if you're planning to apply for a mortgage, and this is really a significant loan, you may not be in a position to do this even if you really want to.
posted by DarlingBri at 2:23 PM on August 6, 2011

Weeel, I can tell you one story. My brother cosigned one of my private student loans (I didn't know about this, my parents arranged it) and I tended to get a few months behind on payments my first few years out of school. My payments were about 50.00 a month on this loan, so I would get at most 150.00 late on it. Anyhoo, when my brother was about to buy a house, he had everything lined up and ready to go, he and his wife made good money...but my late payments came up on his credit, and until I took care of this piddly sum, as my mom called to tell me, my brother couldn't buy his house.

I didn't default mind you, I was just behind. But it nearly screwed him out of a home. This was all before the housing crash, I can't imagine it's better now.

If you think you could, worst-case, take on this loan and pay it off, then go for it. Otherwise, run away.
posted by emjaybee at 4:07 PM on August 7, 2011

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