Dianne Stow
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Real-estate

6/22/2007

Co-signing a loan could put your credit at risk

Q: A friend asked me to co-sign a student loan for her. She will start paying off her student loan after she graduates from school. I am planning to purchase a bigger house next year.

What does it mean to ďco-signĒ a loan? What will I be responsible for? And, how will it affect me in the future in terms of my credit and qualifying me for a mortgage?

I have good credit now, but please help me because Iím not savvy at all on this topic.

A: Iím glad you asked these questions now, before you signed the documents for your friend, rather than after.

When you co-sign a student loan, auto loan or mortgage, you become entirely responsible for this debt if your co-borrower (in this case, itís your friend) stops making her loan payments for any reason. That means, if she suddenly stops making payments, your credit will suffer even if no one told you she has gone delinquent on the loan. If sheís 60 days late in making a payment, your credit history may indicate that youíre 60 days late on this loan.

In addition, because you are a co-borrower, the lender will look to you for full restitution and youíll be on the hook legally for every last dollar due on these loans.

How will this affect your ability to borrow other money? In short, it will reduce the amount which you can qualify to borrow.

When you get approved for a mortgage, a conventional lender will allow you to spend up to 28 percent of your gross monthly income on your mortgage, property taxes and insurance. You can spend 36 percent on your total debt service. That means if your friendís monthly school loan payments will be $250 per month, a lender may subtract $250 per month from the total amount you have to pay off your debt simply because youíve co-signed for this loan.

There are lenders who will not ding you quite in the same way. For example, instead of lowering the total amount of your loan, you may have to pay more in fees or accept a higher interest rate on your mortgage.

While Iím sure you like your friend, the person who should be cosigning this loan are her parents or another relative. Your smartest move is to focus on your own financial future. Co-signing loans can be a risky business and quite damaging to your ability to get your own loan and maintain your own good credit history.

I have quite a bit of additional information on co-signing mortgages on my Web site, ThinkGlink.com. You might check there for additional details.

Q: Iím currently in graduate school and have one more year to graduate. My tuition is paid for, but I have to take out loans for my living expenses.

Iím considering buying a condo once I graduate. Do you think it would be a good idea to take out the smallest school loan for my remaining year and apply for 100 percent financing once Iím ready to buy the condo, or should I take out the maximum loan amount and use the money as a down payment? I have great credit.

A: Itís almost impossible to get 100 percent financing right now. In the wake of the collapse of the subprime market, most of the 100 percent financing money has dried up, except for loans backed by the Veteranís Administration.

So, if you can borrow more money from your student loans, you may want to do it. But remember, youíll need to start paying that loan back six months after graduation, and student loan interest rates arenít that low.

Ilyce R. Glinkís latest book is ď100 Questions Every First-Time Home Buyer Should Ask, 3rd Ed.Ē (Three Rivers Press, $18). If you have questions, you can call her radio show at (800) 972-8255 any Sunday, from 11 a.m. to 12 p.m. EST. You can also write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, IL 60022, or visit www.thinkglink.com.