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The risks you face when co-signing a loan

Summary

When you co-sign on a loan and the original borrower stops paying, your credit report and credit score take a hit, too.

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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 co-sign or not to co-sign, Dad co-signed, I messed up his credit. Now what?

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