A cosigner aids in bearing the financial responsibility for a loan or other type of credit.
When taking out a loan, it is common for lenders to require the borrower to obtain a cosigner.
Cosigners can increase approval odds and help provide more favorable loan terms for the borrower.
- A cosigner is someone who agrees to obtain joint credit with a borrower.
- Both the borrower’s and cosigner’s creditworthiness are evaluated to determine loan approval odds.
- If the primary borrower fails to repay the loan, the cosigner is liable for the outstanding balance.
What is a Cosigner?
A cosigner is someone who agrees to obtain joint credit with another borrower.
For many loans, lenders either require or suggest the primary borrower obtain a cosigner due to insufficient credit history or a low income.
Cosigning can benefit both parties if the loan is repaid on time and consistently, but it can have negative impacts if the borrower defaults.
Depending on the cosigner’s credit and income, adding them onto the loan can improve the primary borrower’s approval odds, increase their principle, and improve the loan’s terms.
Is a Cosigner and a Co-Borrower the Same?
While similar, cosigners and co-borrows are not the same. Cosigners are added onto the loan in name only and do not receive any of the principal.
They are not responsible for payments unless the primary borrower is no longer able to make them.
For loans with a co-borrower, both parties receive a portion of the principal and are equally responsible for the monthly payments.
Like cosigning, the lender assesses both the borrower’s credit in the application and during the underwriting process.
Since both borrowers are analyzed during the underwriting process, they are more likely to receive a higher principal and lower interest rates on their loan, which translates to significant savings over time.
In general, both parties have access to the principal and are equally responsible for the repayment obligation. The most common types of co-borrower agreements are mortgages.
How Becoming a Cosigner Works
Cosigning isn’t only for loans; in fact, one of the most common examples is parents cosigning on their adult child’s apartment lease.
For many first-time renters, obtaining an apartment is challenging due to insufficient credit history and lower incomes.
Many landlords require an established cosigner on the lease, like a parent, for added peace of mind and protection from incidental charges. Although the parent is not the one making the monthly rent payment, they are responsible if their child fails to do so.
If the cosigner cannot or will not make the missed payments, it can negatively impact their credit score. The lender requires information from the primary borrower and the cosigner on a loan application.
They use this data to perform a credit check on both parties and use the results to determine an underwriting decision and the terms of the loan. If approved, the lender prepares the loan contract detailing the terms, interest rates, and the monthly repayment schedule.
Both the primary borrower and the cosigner must sign the loan, and once it is completed, the primary borrower receives a lump sum principal payment.
Since the primary borrower is responsible for the loan repayment, the cosigner’s job is done unless there is a missed payment.
If the primary borrower fails to pay, the cosigner is legally obligated to take over the repayment responsibility. The loan agreement will outline all terms, including details on when they will contact the cosigner.
Depending on the lender, they could contact the cosigner immediately following a missed payment or wait until the loan defaults.
It is important to note that some lenders immediately report delinquent payments to the credit bureaus, which can negatively impact both parties’ credit scores and history.
Who Qualifies as a Cosigner?
Typically, to qualify as a cosigner, you should have at least a 670 credit score, but the higher it is, the lower the interest rate on the loan may be.
Additionally, you should not have a debt-to-income ratio higher than 50%, with a preferred credit utilization rate of 30% or less.
A well-qualified cosigner can reduce a loan’s interest rate by as much as four percentage points or higher, offering significant savings over time.
Can I Remove Myself as a Cosigner?
Depending on the type of loan and the lender, it may be possible to remove yourself as a cosigner. To obtain a cosigner release, you must contact the lender and request they release you from your responsibilities on the loan.
You must also show that the loan has a history of on-time payments. If the lender agrees, you then fill out paperwork that removes your name as the cosigner, making the primary borrower the sole borrower for the loan.
One main drawback of a cosigner release is its possible impact on the loan’s initial terms, especially if the primary borrower’s approval is dependent on the cosigner’s credit.
If the borrower cannot afford the adjusted fees, they may require a debt relief plan to lower their monthly payments.
Upon release, the lender may adjust the current loan terms to reflect the primary borrower’s credit score and payment history. It’s important to note that not every loan offers a cosigner release addendum, so it’s crucial to check the terms prior to signing.
FAQs About Cosigners
Does a cosigner affect your credit?
Having a cosigner on a loan can save your credit if you can’t make a payment, and they make it for you. However, if the loan defaults, it can negatively affect both parties’ scores.
How long does a cosigner’s responsibility last?
The length of a cosigner’s responsibility varies depending on the terms of the loan. In most cases, they must stay on the loan for at least a year.
What fees do you pay as a cosigner?
As a cosigner, you are not responsible for the loan repayment; however, if the primary borrower defaults on the loan, you are liable for the remaining balance.
What happens if my cosigner dies?
Generally, a loan’s terms will remain the same if a cosigner dies as long as there are no missed payments. However, some lenders may require the primary to pay the remaining balance immediately if the cosigner passes, even if there are no missed payments.
Some Final Thoughts About Cosigners
Cosigners can increase approval odds and help provide more favorable lending terms for the borrower.
And a well-qualified cosigner can reduce a loan’s interest rate and provide significant savings over time.
But if your credit is bad and you’re overwhelmed with debt, even a cosigner won’t be enough to fix your financial troubles.
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