When I worked as a loan officer, there were a number of different factors I had to take into account before I could give someone a loan. I not only had to look at their credit report or their FICO score, I had to look at their full financial picture:
- How much money did they bring in every month?
- How much debt did they have in relation to their income?
- Were they over extended?
- How many loans had they taken out in the last 6 months?
- Were they meeting their obligations currently?
- What factors were keeping their FICO score where it was?
Having an overall financial history that extended past what was on paper often allowed me to make a better decision about whether they could actually take on a new loan payment. There were definite red flags that could be raised by their credit report, but sometimes we needed additional information. Sometimes a credit report didn’t give the full financial picture. Credit reports and FICO scores play a very large part in determining whether or not someone may need a co-signer or co-borrower on a loan. Both a co-signer and a co-borrower bear responsibility for paying back the loan if the originator of the loan doesn’t make their payments. However, a co-borrower is listed on property titles, while a co-signer is, in many cases, not. This gives a co-borrower more recourse should the loan go into default and rights to the property in collections.
The need for a co-signer or co-borrower usually comes into play when a person has little to no credit history. However, there are other cases when a someone may need someone to vouch for them in a lending situation. Having a lower FICO score (below a 650 FICO score), a history of not making payments on time or not having verifiable income or enough income to cover the payments may require a co-borrower or co-signer.
Parents will usually co-sign student loans or auto loans for their children. They may even co-sign for credit cards. A parent co-signing for their kids is fairly reasonable. However, there may be a time when someone approaches you and asks you to co-sign for a loan and you need to do a lot of soul searching. Even if this person is a trusted friend or family member you really need to question why this person is coming to you to be a co-signer or co-borrower on their loan. Why are they unable to qualify for this loan on their own? Asking yourself why before you sign on the dotted line, may be the smartest thing you do when it comes to your own credit situation and financial health.