Co-signing on a loan or a mortgage has many implications for both a borrower and a co-signer. Before you co-sign or ask someone to co-sign on your behalf, you need to known as much as possible. Take a moment to test your knowledge with our quiz before you sign on the dotted line.
Co-signing a loan is a legally binding agreement that makes you responsible to pay if the loan goes into default. There are serious legal implications for a co-signer on any loan.
Many friends and acquaintances will warn you that you should never co-sign on a loan regardless of how much you love or trust the person that is asking you to help them.
Advise the person to be aware of what they are getting into by co-signing a loan contract. They should find out everything they can and consult with a professional before they sign on the dotted line.
The bank is seeking a co-signer that is perfectly capable of making the payments on the loan if you default. A co-signer has to meet all of the same criteria that you do and more.
The bank will usually require that your spouse co-sign a loan regardless of your financial standing. In most cases, they will tell you that you need a co-signer only if you and your partner's joint finances do not meet their criteria.
No matter how much you trust the borrower it makes perfect sense for both parties to have an enforceable contract specifying responsibilities with regard to the property. These should be specify terms, such as who will be living in the property, who will maintain it and who will pay the associated bills.
Experts recommend that a co-signer should have their attorney review all documents associated with the loan and verify the property title. Have your lawyer make it perfectly clear exactly what you are agreeing to when you co-sign.
As a co-signer, you will have to meet the same criteria that the loan applicant has to meet in order to satisfy the banks requirements. This will include giving authorization to verify employment, income and credit rating, along with filling out a loan application.
Unless you are the spouse or joint owner, a co-signer’s name is not usually included on the deed or property title. That is why you need to be cautious about co-signing; you are fully responsible to pay if the loan defaults but you are not registered as an owner.
When you co-sign on a property, the debt will be considered part of your debt load and could have a negative impact when you try to obtain a mortgage. In addition to any loan liability, any payment problems the owners have will affect your credit score.