Lenders ask for cosigners when your credit or income isn't strong enough to qualify for a loan. While a lender can't require a specific cosigner, including a spouse, it can refuse to extend a loan based solely on your credit and assets. If you enlist a cosigner, he takes on the same responsibility for the debt as you.
Committing to a Cosigner
It's important to understand what you're asking your husband to do when he cosigns for a loan. The cosigner does not just vouch for your character or ability to pay back the loan. Instead, the cosigner makes the same commitment to pay the loan as the primary signer. In other words, both are legally obligated to pay the debt. If a payment is late, and your husband is a cosigner, then his credit can suffer the same negative impact as yours. If you don't pay the debt, your creditor will come after both you and your husband.
Limiting Loan Options
The loan can also inhibit the cosigner from getting another loan. Lenders look at a borrower's total debt and outstanding loans when approving loans. If the ratio of the debt to income is too high, the lender may decide a new loan is too risky. This is particularly true if you want to get a home loan. Your debt-to-income ratio without the mortgage needs to be 28 percent or less, while your debt-to-income ratio including the home loan needs to be no more than 36 percent. Also, if the cosigned loan is revolving debt, like a credit card, the balance can affect the credit utilization of a cosigner, which can cause his credit score to go down.
Getting Better Rates
If you and your husband agree to sign together, you can save money if his credit is better than yours. Usually the lender qualifies you for the loan based on the higher credit score, which can lead to lower interest rates and lower payments. In some cases, you can lower your rate by 10 to 15 percent if you’re buying a car. If your husband's credit score is below yours, the only reason to have him cosign is if you need his income to qualify for the loan.
Deciding on a Cosigner
The loan that you're taking out may be for a purchase that you're sharing with your husband, like buying a family car or home. In this case, cosigning the loan together is appropriate. However, many financial experts do discourage people from committing themselves as cosigners because failure to follow through and pay the debt off can damage your relationship, as well as your credit score.
- Consumer Financial Protection Bureau: I Was Asked To Co-sign Financing for a Car. What Am I Being Asked To Do and What Does This Mean for Me?
- Consumer Financial Protection Bureau: If I Need To Have a Co-signer, Can a Lender or Dealer Require that It Be My Spouse?
- ABC News: Will Cosigning Hurt My Credit?
- Consumer Financial Protection Bureau: I Was Told I Need To Have a Co-signer in Order To Get Financing. What Does That Mean?
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