Today I’m here to talk about what are the risks co-signing or acting as a guarantor for someone on their loan. Whether it’s a car loan, mortgage, or anything in between, there are some real risks that I wanted to address.
You’ve probably heard of this, a parent co-signing for their child to buy a car, or a family member co-signing for another relative to help them buy a house. These are obviously trusted family members or very close people that you know. You’re not out there co-signing for strangers whom you don’t know what their finances are like. It seems as long as you make your choice correctly, there’s not really any risk.
1. What if the other person doesn’t pay?
The first item that I wanted to bring to your attention is if the other person doesn’t pay, they default on their loan and you are now responsible for that debt. The part that seems to catch people off guard is that you are responsible for the entire loan. Not half, not a couple months worth of payment…you are now expected to pay back the entire amount. People don’t seem to expect that when they do get into trouble. Not to mention your credit is going to be affected & collections is going to come after you.
All round, it is a very unpleasant situation, especially if you are dealing with close friends or family members, how do you resolve it in an amicable way and not get yourself in more trouble?
2. What if I co-sign and I want to apply for a mortgage?
The second thing which is even lesser known is what if your friends or family members are making all of their payments? There’s no default, everyone’s credit is perfect, everybody is happy, but you did co-sign for this person and maybe they have a $500 per month car loan.
What if you decide to buy a house now and you need to apply for a mortgage? Even though this car does not belong to you, you don’t make the $500 per month payments, and you don’t get any benefit from this car, you are still responsible for $500 per month. Again, not half, not 2 or 3 months worth of payments, but the entire $500 per month.
What the lenders are going to do when they’re calculating your financial balance sheet is they’re going to say, okay, you already promised this $500. In case that other person doesn’t pay, we’re going to take $500 per month of your income and reserve it. Whatever is left of your income, you can use that to try to qualify for a mortgage. If you make $2000 per month, a quarter of your income is now gone and reserved, and they won’t let you use that in qualifying for a mortgage so you may end up with something a lot smaller than you had initially thought.
So if that’s of concern to you, or you want to know more, there are a lot of intricacies to this that we usually get into with mortgage prequalification, feel free to give us a call at 1-866-924-5244.