Whether or not to cosign a home equity loan for a friend or family member is a deeply personal decision that requires plenty of forethought. Before you agree to cosign, it's important to weigh both the pros and the cons of your decision. While you may feel good about helping a friend, for instance, the relationship could turn sour if the loan defaults and your credit is affected. Cosigners don't need to be on the deed, but they do need to be in good shape financially.
Home Equity Loans
Home equity loans give homeowners the chance to use the equity they've built up in their homes to do things such as make home improvements, buy a car, finance a vacation or pay for a child's education. Depending on the applicants' financial picture, they may be able to take out up to 85 percent of the home's equity. This can be offered as a straight home equity loan or a home equity line of credit, which provides the homeowner with a revolving line of credit to use as needed.
To see if an someone qualifies for a home equity loan, a lender will look carefully at the applicant's entire financial picture. This includes credit score, income, savings and investments. If the financial picture isn't quite strong enough, the lender may recommend getting a cosigner to guarantee the loan. This person should have a strong credit score and be financially stable enough to take on the debt if the applicant defaults.
If you're asked to cosign a loan, you need to understand what a big responsibility it truly is. After all, you are being asked to guarantee payment of the debt in the event that the applicant defaults. What this means is that the loan will become your responsibility to pay. You also need to understand that cosigning a loan can lower your credit score and hurt your chances of securing a loan or line of credit of your own. With the open debt on your credit report, lenders might view you as having too much debt to qualify for good loan terms. In some cases, they might reject your application altogether.
If after considering the obligation carefully you agree to cosign the loan, make sure you get written documentation from the lender that states that they'll contact you immediately if the primary lender misses a payment. This will give you an opportunity to make the missed payment and prevent the default from hurting your credit score.
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