Couples who need a co-signer on a loan are going to need someone who is willing to let a lender peer into his personal finances. A lender requires borrowers to get a co-signer when they can’t meet a bank’s lending standards on their own. In turn, co-signers must show they have a credit history and income that meets those standards to help borrowers get a loan.
Promise to Pay
A co-signer guarantees repayment of a borrower's loan, so couples who ask someone else to co-sign on a car loan or mortgage are actually asking that person to commit to paying off their loan if they don't. A lender will require the co-signer to sign a contract guaranteeing repayment of the loan. Co-signers must also commit to paying any late fees added to a loan if the borrower falls behind on payments.
Lenders sometimes require borrowers to get co-signers when they have a poor credit history or a short credit history that doesn't provide sufficient information on how well they manage debt. Lenders’ requirements for co-signers’ credit scores vary, but someone who has a score of 700 or above is more likely to be accepted as a co-signer than someone with a lower score. Lenders typically classify people with scores of 700 and beyond as prime borrowers because they've established a good debt-repayment history.
Banks require co-signers to submit documents, including pay stubs, that show they have sufficient income to pay off a co-signed loan if necessary. Borrowers won’t get a loan if it appears their co-signer is already deep in debt. Lenders generally prefer to see a debt-to-income ratio of 36 percent or less, according to Experian; this includes payments on the loan to be co-signed. Lenders calculate the ratio by adding up the monthly payments shown on a co-signer's credit report and dividing the resulting number by the co-signer's pretax monthly income.
Lenders typically like to see that a co-signer has a stable work and residence history. A lender may view a loan application more favorably if the co-signer has lived at the same address for at least five years, for instance. A bank may deny a loan if a co-signer switches jobs frequently, because the co-signer's employment appears unstable. An unstable work history can lead to a denial, even if the co-signer earns a high income.
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