If a family member or friend wants to buy a house or car, or take out a personal loan, but doesn’t have enough income or a high enough credit score to qualify, he or she may ask you to cosign the loan. The lender will consider the income and debts of both applicants when deciding whether to approve a loan application. If you’re thinking about buying a house in the near future, cosigning someone else’s loan may complicate things.
What Can Cosigning a Loan Mean for You?
If you cosign a loan for another person, that means you accept the financial obligation associated with it. If the primary borrower doesn’t make payments on time, the debt will become your responsibility. Missed payments can damage your credit score and may make it difficult or impossible for you to qualify for a loan of your own.
How Can Cosigning a Loan Affect Your Chance of Getting Approved for a Mortgage?
When you apply for a mortgage, the lender will look at your credit score and debt-to-income (DTI) ratio. If you cosign someone else’s loan, the monthly loan payments will be included in your monthly debts when a mortgage lender calculates your DTI ratio. If your DTI ratio is too high, you may not qualify for a mortgage. A high amount of debt can also have a negative impact on your credit score.
If your income is high enough, cosigning someone else’s loan may not affect your ability to get a mortgage at all. If your income is stable and you can afford to make the payments for the loan you cosigned (if the primary borrower is unable to pay), plus cover your own mortgage and other debts, you may be able to get approved for a home loan without a problem.
How Can You Qualify for a Mortgage After Cosigning a Loan?
If the primary borrower has a high enough income and credit score, refinancing may be an option. If the primary borrower refinances the loan and takes your name off it, the loan will no longer be considered your debt.
If you cosign a loan and then decide to buy a house later, the outstanding balance will go down if the primary borrower makes payments on time. The loan’s effect on your finances may therefore decrease over time. If the primary borrower makes payments on time for a year, the loan may not be counted in your monthly debts at all when you apply for a mortgage.
Think Carefully Before You Cosign
Cosigning a loan can help out a loved one in need, but don’t go into it blindly or focus so much on helping someone else that you sabotage your own financial goals. Make sure you understand the implications of cosigning a loan before you make a decision.