Before you agree to be a co-signer for a friend or family member, consider the hidden dangers. By co-signing, you are not simply vouching for that person’s integrity. You are legally taking on responsibility for the loan yourself.
As a result, the debt and payment are yours in the eyes of a mortgage lender. The mortgage underwriter will calculate that payment into your debt ratio. This could easily prevent you from being able to buy the house you want. But hold on, there’s more…
Five Reasons Why Co-Signing is a Dangerous Move
1) No one can predict the future. What if the primary borrower gets hit with an illness and is hospitalized? What if he/she needs surgery and cannot work? What if the company they work for is sold or undergoes a restructure so that they are laid off work? What if they are a victim of identify theft? What if natural disaster strikes? What if they die in a crash? I don’t mean to be negative, but no one can promise with 100% certainty that the loan won’t pass on to you.
2) If the primary borrower does not make payments for any reason whatsoever, you are legally responsible for the loan. No exceptions.
3) The debt goes on your credit report. This could lower your credit score due to high balance-to-limit ratio and/or to debt load.
4) The debt goes on your debt ratio. This could prevent you from being approved to buy a house or an automobile.
5) It has the potential to harm, and even completely ruin, a good relationship. It’s happened more often than you might think.
Never co-sign for your girlfriend or boyfriend, not even if you are engaged to be married. That might sound extreme, but I’ve seen too many tearful people with unpaid debt on their credit reports that are leftover from a relationship that didn’t work out. Not only did the string of late payments ruin their score, but they were prevented from moving on with their lives in buying a home for themselves.
I’ve seen co-signing situations turn into lawsuits among family members.
Co-signing is dangerous. If you value your relationship, say no. Often people don’t realize what they’re asking, and if they did, they would not put you in such an awkward and precarious position.
If you feel reticent to say no, then blame it on me. Say, “I’d be happy to write you a letter of recommendation, but Carolyn Warren — whose advice I follow — says co-signing is dangerous and must not be done, ever, no exceptions.”
Make your friend or family member feel good with a nice letter. But whatever you do, DO NOT SIGN a legal agreement, not even as a co-signer.