The risks you face when co-signing a loan

If the original borrower fails to pay, your credit is impacted

By Todd Ossenfort

The Credit Guy

The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues. Ask a question 'The Credit Guy' archives

Dear Credit Guy,
I co-signed on a home loan, and the person who was making the payments had the statements and any information to do with the loan mailed to his office. I was unaware that he stopped making the payments. He was trying to get the loan adjusted for a lower interest rate. They told him the payment would be lowered by $800 to $1,000 a month and they would do the adjustment, but he has to be late with payments first! He is now three months late. Now my credit is messed up really bad, and I was trying to buy a house for myself. I never got any phone calls or notices in the mail. The creditor never tried to get in touch with me at all, but they did put the late payments on my credit report, which shows three months late. He said he would have all payments made by September 20. Is there anything I can do? I'm so sick over this. -- Donna

Dear Donna,
You are unfortunately in very good company with many other people who have learned the hard way that co-signing for a loan is never a good idea. One of the main reasons is exactly what you reference in your question -- the creditor does not typically communicate with the co-signer unless the original loan holder defaults. And then the communication is rarely good and usually too late to prevent harming the co-signer's credit.

The good news is that it sounds as if the person for whom you co-signed is close to catching up on all the past due payments. I would recommend that you communicate with him and request that he ask his lender to remove the past-due items associated with the loan from your credit report. If he makes the request as a condition before making the past-due payments, the lender may be more likely to do it. The lender certainly does not have to honor the request, but it doesn't hurt to ask.

Whether or not the information regarding the late mortgage payments are removed from your credit report will dictate how you proceed with securing your own mortgage. If the information is removed, your good credit history should be restored, and all will be well. If, however, the negative information remains, be sure that the lender reports to the credit bureaus that the account has been brought current (all past due payments made) as potential lenders will want to see that they have been.

Before shopping for your mortgage obtain all three of your credit bureau reports by visiting annualcreditreport.com. You will want to know exactly what potential lenders will be viewing when they review your credit report. You are entitled to review free copies of your reports once a year. Review your credit reports for any inaccurate information and assure that the co-signed mortgage is reported correctly. Dispute any inaccurate information with the credit bureau that reported it. You can do so online or in writing.

Be aware that even if the co-signed mortgage does not show up as a negative on your credit report, it still may affect your ability to obtain your own mortgage. The reason is that as a co-signer, you have agreed to be responsible for the debt should the primary loan holder default. To a potential lender, the amount of the mortgage loan is an outstanding obligation for you even though you are only the co-signer. So, as long as the lender believes you can take on the additional debt load of your own mortgage and you have a good credit history, you should qualify for an affordable mortgage loan.

One last thought, a good rule of thumb with co-signing is to view it as a personal loan. If you cannot afford to loan the person the amount of the loan you would be co-signing, you can't afford to secure the loan as a co-signer.

Take care of your credit!

See related: To cosign or not to cosign, Dad co-signed, I messed up his credit. Now what?

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: September 21, 2009

	Three most recent The Credit Guy stories: In default on car loan: What to do? – If you are in default on a car loan, but want to make amends, it might help to sit down with the lender and discuss possible payment options ... How to pay $12,000 in credit card debt quickly – When it comes to paying off card debt, it's important to remember that there's no quick fix. Determination and patience will do the trick ... Debt can slow down retirement goals – Debt happens. But how you handle it depends on whether you take charge of it or you allow it to take charge of you ...

	CreditCards.com's newsletter Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!