Understanding the Role of a Cosigner in Securing a Loan

When a loan or credit line seems out of reach, adding a cosigner might give your application just enough of a lift to gain approval. A cosigner is a person who agrees to cover your missed payments or debt if you don’t pay according to your loan agreement. A cosigner adds their good credit and income to your application, which can make you more appealing as a borrower.

What Is a Cosigner?

A cosigner on a loan or credit application takes responsibility for your debt if you are unable to pay. A cosigner agrees to cover missed payments—and potentially your entire debt—if you fail to make payments or default on your loan. If you’re having difficulty qualifying for a loan or credit card, adding a cosigner may strengthen your application. A cosigner acts as a backup and removes some of the risk when lenders are considering a borrower with bad or no credit, or with too little income to qualify for a loan on their own.

Cosigning has the potential to affect the cosigner’s credit. To start, the lender will run a hard credit inquiry and review the cosigner’s credit score and report. The cosigned loan will appear as debt on their credit report, which could affect their ability to qualify for loans and credit in the future. Late payments, if they happen, can also have a negative effect on their credit.

By staking their good name (and good credit) on your ability to repay, your cosigner is taking a chance on you. Most often, cosigners are family members or close friends—people who trust you and have an interest in seeing you succeed.

When Do You Need a Cosigner?

You might consider a cosigner when your credit, income, and assets don’t qualify you for a car loan, student loan, mortgage, or personal loan. Here are a few scenarios where a cosigner might help:

• You have poor credit or no credit: You recently graduated from college and need a car to commute to a new job. Because you don’t have much experience with credit, your credit score is low and your credit history is slim. Having a parent with good credit cosign could help you qualify for the car loan you need.
• You need additional income to qualify for a loan: You and your spouse want to buy a home, but your combined incomes don’t quite meet the debt-to-income requirements. Adding a cosigner with substantial income may help you nudge your application into approval territory. The lender may also consider a cosigner’s assets when evaluating your loan.

Not all lenders allow cosigners, and adding a cosigner won’t necessarily get your loan approved. However, it never hurts to ask your lender about the possibility of using a cosigner if you have someone suitable (and willing) in mind.

Does a Cosigner Need Good Credit?

Ideally, a cosigner should have good to exceptional credit, with a credit score of 670 or better. Each lender will have its own income and credit requirements for cosigners. Essentially, lenders expect cosigners to qualify for the loan or credit line in question. Even when lenders don’t have a minimum required score, a cosigner should have a strong credit history, especially if the original borrower’s credit is lacking.

Can Someone With No Credit Cosign?

What if your credit is good but your income is marginal? It’s possible that your cosigner’s income will help your case—even without a boost to your credit—but many lenders want to see cosigners with both a solid income and good credit.

Cosigner Requirements

Check with your lender first to find out about cosigner requirements. Knowing them helps you and your cosigner prepare the information and documents you’ll need to complete your application. In general, expect to cover the following bases:

Credit Requirements

Your lender will check your cosigner’s credit report and credit score. Your cosigner will need to provide their full name, address, and Social Security number so the lender can pull their credit.

Having your cosigner check their credit in advance can help you avoid surprises. Anyone can check their own credit reports at all three credit reporting agencies for free at AnnualCreditReport.com. Experian also allows you to check your credit score for free online anytime.

Income Requirements

In addition to having a good-to-excellent credit score, your potential cosigner will need to show that they have enough income to pay back the loan if you default on it. If they don’t have sufficient income, they won’t offset the lender’s risk and may not be able to cosign.

To determine whether a potential cosigner has enough income, the lender will likely calculate their debt-to-income ratio (DTI), which compares their total monthly debt payments with their earnings. You can estimate your potential cosigner’s DTI before they apply by adding up all of their monthly bills, including the new loan payment they’d be liable for in the event you default, and dividing that amount by their monthly pretax income. Lenders typically like to see a DTI of less than 50%, including payments on the cosigned loan.

Signing Requirements

Your cosigner must be available to sign application documents according to the lender’s requirements: in person, with a notary, or by e-signing. They may also need to provide documents, which could include the following:

• Government-issued identification
• Social Security card
• Proof of income
• Proof of assets
• A list of debts

Alternatives to Cosigners

If you can’t find the right person to cosign your loan—or your lender doesn’t allow cosigners—you still have alternatives:

Look for a New Lender

Different lenders have different underwriting criteria. If you aren’t having luck with one lender, you may want to check with others. Online lenders and credit unions are two places to start. If you’re trying to get a home loan, a government-backed loan from the FHA or VA might help you qualify with a lower credit score.

Consider a Secured Loan

If you’re having trouble getting approved for an unsecured personal loan or credit line, a loan secured by an asset might be worth investigating. Some lenders allow you to use an asset such as a savings account as collateral on your loan. Asset-backed loans may be easier to qualify for and may have more favorable rates as well.

Get a Secured Credit Card

If a prospective credit card doesn’t allow cosigners and you can’t qualify on your own, consider a secured credit card that requires a cash deposit equal to your credit line: For example, you deposit $500 to get a $500 credit limit. You build credit as you use and make payments on your card, no cosigner needed.

Adjust Your Sights

Failing to qualify for a loan may be a sign that your loan isn’t affordable (or advisable) for you. If you can, consider a smaller loan.

Try Again Later

Sometimes, taking six months or a year to build your credit and save a bit more for a down payment can make the difference between loan approval and denial. You may even get a raise that helps you meet income requirements while you work on your credit.

The Bottom Line

The ability to qualify for loans is one of the best reasons to build good credit and maintain a solid income. If your loan application needs a little help from a cosigner, look for a family member or close friend who has very good to excellent credit and ample income. Also look for a cosigner with whom you have mutual trust, then live up to that trust by repaying your loan on time and without a hitch until it’s paid off—or until you can refinance on your own without the aid of a cosigner.

If you want help building good credit, consider free credit monitoring from Experian. You’ll get online access to your credit score and Experian credit report any time and receive alerts whenever there are changes to your credit file, so you can keep up with your own progress.

For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our experienced loan officers. We are committed to helping you find the best mortgage solution tailored to your needs.