What is a Cosigner?
You’ve recently been asked by a family member to be a cosigner so the individual can be approved for a loan. While you want to help, you may have some serious doubts and questions regarding what being a cosigner all entails. Get the facts below.
A cosigner is an individual who agrees to make payments on a loan if another fails to make the payments. The cosigner agrees to this by signing loan documents designating the same. In terms of credit worthiness, a cosigner is considered the same as if he or she were the borrower. In other words, if an individual is applying for a loan but is already a cosigner on another’s loan, this can show up on the credit report.
When is a Cosigner Required?
Individuals who have never had credit often use a cosigner to help them get their first loan. It’s reassuring to the lender to know that the loan will be paid one way or another. Individuals who have poor credit may also use cosigners to help them get credit that they might not otherwise be approved for and help them reestablish their credit.
Is Cosigner and Co-borrower the Same?
Although cosigners and co-borrowers are very similar, the FHA and most other lenders view them as very different. While a cosigner and co-borrower are both signing on the dotted lines and agreeing that the loan will be paid, that’s where the similarity ends. As a cosigner, you’re agreeing to pay the loan if borrower fails to make the payments as promised, but you have no ownership in the property.
You may end up paying the loan off, but the property still belongs to the original borrower. As a co-borrower, you have equal ownership in the property. Cosigners are required to make the payments if the borrower does not whereas co-borrowers are just as responsible for the payments as the borrower. In both cases, the credit scores can be negatively affected if the original borrower fails to make the payments.
Pros of Being a Cosigner
Being a cosigner can have its high and low points. According to U.S. News & World Report, there are both pros and cons to being a cosigner. Below are the pros of being a cosigner.
- You have the opportunity to help a friend or family member make a purchase.
- You are helping another build credit.
- You are fostering a relationship based on trust.
- You are letting the lender know that you have faith in the borrower’s ability to repay the loan.
Cons of Being a Cosigner
Sometimes, regardless of how much you want to help someone, it’s just always wise and practical. Below are the cons of being a cosigner.
- Your credit will go down if the borrower doesn’t make payments on time.
- The amount that is owed on the loan can affect the amount you are able to borrow on your own.
- If the loan goes into default, it’s the same as if it were your loan.
- If additional fees are added to the loan, they can become your fees.
- Personal relationships can be damaged.