A co-signer is someone who signs a contract agreeing to repay a loan should you stop making on-time payments or default on the loan. Co-signers are usually relatives, friends or spouses but anyone with good credit, a willingness to help you and accept the risk that comes with co-signing can do it. A co-signer has to have very good to excellent credit, as well as understand the responsibilities and liability involved. Having a co-signer can help you get approved for a student loan, mortgage or car loan. A co-signer even can help you to lease your first apartment.
Understanding the Co-signing Process
Qualifying as a co-signer is similar to qualifying for the loan. The co-signer has to fill out an application and agree to a credit check. In addition to very good credit, lenders will look for indications of stability in your co-signer. There are always exceptions to these requirements but lenders generally like to see that the co-signer has a steady job and has lived at her current address for more than five years. The lender also wants to know if the co-signer rents or owns a home. Owning is better.
In addition to filling out an application, your co-signer may be asked to produce documentation of his income and assets such as pay stubs and bank statements. If your co-signer is self-employed, the lender may require her to submit tax returns for the past few years.
What Makes a Good Co-signer
The better the co-signer’s credit score is, the better his chances are of being accepted by the lender. In addition to creditworthiness, lenders look at a co-signer's debt-to-income ratio. Debt-to-income ratio is the percentage of a person's income that goes toward making payments on his debts. Most lenders want to see a ratio that is low enough that the co-signer could realistically take over your loan payments if you default.
Lenders set their own limits for acceptable credit scores and debt-to-income ratios. However, in general, co-signers' credit scores need to be well over 700 (740 and up is best) and debt-to-income ratios should be lower than 36 percent (the lower the better). Your credit history matters too. The worse it is, the better the co-signer’s has to be.
Common Age Requirements
In most states, you’re considered an adult at 18. This is also the minimum age you have to be to sign a contract. So 18 is the minimum age for a co-signer. However, most 18-year-olds do not have enough financial resources, credit history or job longevity to be co-signers.
On the other side of the age spectrum, lenders are not allowed to discriminate based on a co-signer being elderly. However, loan contracts with co-signers often contain a clause that says the loan must be paid in full if the co-signer passes away. So it’s in your best interest to choose a co-signer who is younger than 65 and in good health.
Identifying Your Benefits
Having a co-signer can greatly improve your chances of qualifying for a loan that you know you might not be approved for on your own. Once approved, the loan will show up on the credit reports of both you and your co-signer. If you make payments on time, having a loan in good standing should improve your credit score and your chances of being able to qualify for credit on your own in the future.