Not long ago a guy called me about a mortgage to purchase a home. He was a very nice guy to chat with, but it soon became evident that his "niceness" had created some problems for him. He had really great credit at one time, but he recently made an error that completely messed it up.
So what exactly was his error? Well, he cosigned a car loan for somebody. And incredibly, this somebody didn't turn out to be his son, wife, daughter, or mother - it was his coworker. Wow! I'm pretty uncomfortable with the idea of cosigning anyway, but it would never occur to me to cosign for somebody I merely worked with.
Sadly - and predictably, you might say - the coworker failed to keep up with his payments and the car ended up being repossessed by the bank. Now the well-intentioned gentleman had an ugly ding on his credit, seriously damaged credit scores, and he couldn't get a loan to buy the home he wanted.
Be Wary of Putting Your Credit Into the Hands of Somebody Else
It's important to point out that when you cosign, you're putting your good credit into the hands of somebody else. They have the power to destroy it if they fail to meet their obligations. And if they stop making payments on a debt you cosigned, the bank has the legal right to come after you for the money. If you end up with damaged credit, it could limit your ability to get a good loan and end up costing you a lot of money.
I know of a father who cosigned for his daughter and ended up with seriously damaged credit after she failed to keep up with the payments. The father was stuck in an old mortgage with a high interest rate that he couldn't refinance. His daughter's irresponsibility ended up costing him a lot of money over the years.
Even if the person you cosign for keeps up with payments just fine, it can still make it difficult for you to qualify for a 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 individual has been making the payments for the last 12 months. If that's not possible 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 put your credit into the hands of somebody else by cosigning. Credit blemishes can hang with you for a very long time and make it very hard to get a loan when you want one. And even if you can get qualified, you could end up paying a much higher rate that could cost you for many years to come.
So what exactly was his error? Well, he cosigned a car loan for somebody. And incredibly, this somebody didn't turn out to be his son, wife, daughter, or mother - it was his coworker. Wow! I'm pretty uncomfortable with the idea of cosigning anyway, but it would never occur to me to cosign for somebody I merely worked with.
Sadly - and predictably, you might say - the coworker failed to keep up with his payments and the car ended up being repossessed by the bank. Now the well-intentioned gentleman had an ugly ding on his credit, seriously damaged credit scores, and he couldn't get a loan to buy the home he wanted.
Be Wary of Putting Your Credit Into the Hands of Somebody Else
It's important to point out that when you cosign, you're putting your good credit into the hands of somebody else. They have the power to destroy it if they fail to meet their obligations. And if they stop making payments on a debt you cosigned, the bank has the legal right to come after you for the money. If you end up with damaged credit, it could limit your ability to get a good loan and end up costing you a lot of money.
I know of a father who cosigned for his daughter and ended up with seriously damaged credit after she failed to keep up with the payments. The father was stuck in an old mortgage with a high interest rate that he couldn't refinance. His daughter's irresponsibility ended up costing him a lot of money over the years.
Even if the person you cosign for keeps up with payments just fine, it can still make it difficult for you to qualify for a 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 individual has been making the payments for the last 12 months. If that's not possible 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 put your credit into the hands of somebody else by cosigning. Credit blemishes can hang with you for a very long time and make it very hard to get a loan when you want one. And even if you can get qualified, you could end up paying a much higher rate that could cost you for many years to come.
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What is a great credit score when you're looking for a mortgage? Find out what is considered good credit here.
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