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.
- EStudentLoan: What to Look for in a Student Loan Cosigner
- The Basics of Debt-to-Income Ratios
- Consumer Financial Protection Bureau. "What Is a Co-Signer?" Accessed Dec. 18, 2019.
- Santander Bank. "Personal Loans From Santander Bank." Accessed Dec. 18, 2019.
- Wells Fargo. "Personal Loans." Accessed Dec. 18, 2019.
- Consumer Financial Protection Bureau. "What Are Common Credit Report Errors That I Should Look for on My Credit Report?" Accessed Dec. 18, 2019.
- Consumer Financial Protection Bureau. "How Do I Get and Keep a Good Credit Score?" Accessed Dec. 18, 2019.
- New York State Higher Education Services Corporation. "NYHELPs Cosigner Liability and Release." Accessed Dec. 18, 2019.
LeDona Withaar has over 20 years’ experience as a securities industry professional and finance manager. She was an auditor for the National Association of Securities Dealers, a compliance manager for UNX, Inc. and a securities compliance specialist at Capital Group. She has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She has done volunteer work in corporate development for nonprofit organizations such as the Boston Symphony Orchestra. She currently owns and operates her own small business in addition to writing for business and financial publications such as Budgeting the Nest, Zacks and PocketSense.