Lenders request a co-signer when the primary borrower is a bad credit risk and the lender does not want to issue the loan. When a co-signer signs the loan agreement, the lender can pursue the co-signer for repayment if the primary borrower defaults. Therefore, lenders are looking for co-signers who have both a good credit history and enough income to be able to repay the debt.
Each lender sets its own standards for how good a co-signer's credit needs to be. However, in general, the co-signer should have at least a few years of credit history with no major delinquencies, such as bankruptcy, foreclosure and court judgments. A co-signer who has had credit problems in the past needs to have boosted his score since then by paying bills on time, keeping credit card balances low and applying for credit minimally.
Lenders usually ask the co-signer to state his annual income on the credit application. In some cases, the lender will call the co-signer's employer or ask for recent pay stubs or last year's tax return to verify this income. Income is especially important for co-signers on a mortgage. The co-signer's income must be high enough that he could afford to make the mortgage payments.
In addition to credit history and income, lenders evaluate a co-signer's creditworthiness by looking at his current debt obligations and his stability of employment and living situation. Someone who has moved or changed jobs frequently might not qualify as a co-signer because he is likely to be unstable in the future as well. Someone who already has a lot of debt will also not be a good co-signer because he would be unlikely to be able to pay this debt if needed.
Risks of Co-Signing
In addition to meeting the lender's requirements, the co-signer must be willing to take on the risks of co-signing. The loan or credit card will be reported on the co-signer's credit reports, and any late payments the primary borrower makes will affect the co-signer's credit score as well. In addition, the co-signer might have to pay the full amount owed on the credit card or loan if the primary borrower refuses to make payments. Lastly, the co-signer should be willing to remain on the loan contract until the full debt is paid. After signing, the lender has no obligation to release the co-signer from the contract.