Lenders extend credit to unqualified applicants who can present a co-signer with significant income and a good credit history. If you fit this criteria, you may be asked to secure a home equity loan for a friend or relative. Home equity loans are credit applications. You do not need to be on the deed to co-sign the loan. Co-signing does come with significant financial risk. Make sure you are ready for the responsibility and issue some safeguards in the loan contract to minimize your total risk.
Home Equity Loans
Homeowners with equity in their property may apply for a home equity loan or line of credit. You take out a loan against your equity in the property. The loan issued is for the requested amount up to the amount of equity in the property. You retain the equity in the home but promise to pay back the amount owed. In return for issuing the funds, the lender places a secondary lien on the property to assure repayment.
You need more than property equity to qualify for a home equity line of credit. Like all credit, home equity loans are based on your income level and past credit history. Even with sufficient equity in the property, you may be denied the loan if you have poor credit or low income. With sufficient income but poor credit, you may receive less-than-favorable terms such as a higher interest rate. Offering a co-signer to secure the debt may sweeten the deal.
Co-signers are joint applicants on the loan. The co-signer uses his good credit history or higher income to secure the loan for the primary applicant. The primary applicant is responsible for making the monthly payments. Should the primary borrower stop, the lender may pursue collection efforts against the primary borrower or the co-signer to recover the money owed.
Co-signing may significantly affect your credit score if the primary borrower stops paying the bill. All account activity reported on the primary borrower's credit report also shows on the co-signer's credit report. Late payments, collection entries and judgments all lower your credit score and decrease your likelihood of getting credit later on. You may also have trouble qualifying for a mortgage loan with a co-signed loan on your credit report. The increased debt load may cause a mortgage application denial.
Get documentation in writing that the lender should contact you if the primary borrower defaults. By getting immediate notification, you may make the payment on the primary borrower's behalf and save your credit standing. You may also request a modification of the loan terms prior to signing to limit your total liability to the balance of the loan excluding late fees, attorney's fees or interest on the total owed.
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