Imagine you want to buy a home with a mortgage loan, but you have bad credit.
When you apply for preapproval, you’ll find that lenders can’t offer you the best interest rates. You may have a hard time getting approved due to your credit score. You know that your mother has an 800 credit score, so you ask her to co-sign your loan application. She agrees and signs her name on the applications.
Suddenly, you’re a much more appealing candidate for a mortgage. The lender considers both your income and your mother’s when they look at your application. Lenders also consider your mother’s finances, debt and credit when they look at your application, and decide to approve you for your loan.
From here, your mortgage generally functions the same way it would if you were the only person on the loan. You make a premium payment every month to cover your principal, interest, taxes and insurance (PITI), and you enjoy your home. However, the lender may hold the nonoccupant co-client responsible if you miss a payment. This means your lender has the right to take your mother to court and force her to repay the loan.
Co-signing isn’t just for mortgage loans. You may have a co-signer on personal loans, student loans and auto loans as well.
Whether you can have a co-signer depends on the type of loan you take out. Co-signers are most common on two specific types of mortgages: conventional loans and FHA loans. Let’s take a look at the limitations for both types of loans.
Conventional Loan Co-Signer Requirements
If you’re looking to apply for a conventional loan with a co-signer, they’ll need to sign the home loan and agree to repay the mortgage if the primary occupant defaults. However, the co-signer doesn’t need to be on the home’s title. The lender looks at both your credit and the co-signer’s credit to determine if you can get a loan.
When they look at your application, lenders will also consider you and your co-signer’s debt-to-income (DTI) ratio. Every lender has its own standards when it comes to what they consider an acceptable DTI. Knowing both your own and your co-signer’s debt-to-income ratio can make getting a loan easier.
FHA Loan Co-Signer Requirements
FHA loans are government-backed loans that allow you to buy a home with a lower credit score and as little as 3.5% down. If you want to get an FHA loan with a co-signer (you can have a maximum of two), your co-client will need to meet a few basic criteria.
First, your co-signer must be a relative or close friend. Mortgage lenders consider the following relatives as eligible to be co-signers on FHA loans:
- Parents and grandparents (including step, adoptive and foster)
- Children (including step, adoptive and foster)
- Siblings (including step, adoptive and foster)
- Aunts and uncles
- In-laws
- Spouses or domestic partners
If the co-signer is a close friend, you’ll need to write an additional letter to your mortgage lender explaining your relationship and why your friend wants to help you.
Your nonoccupant co-client must also live in the United States for most of the year. They must have a DTI of 70% or lower if you have less than a 20% down payment. On an FHA loan, the co-signer must be on the title of the home.
We all need help from time to time.
If you’re struggling to get approved for a car loan, you might need help from a relative, a partner or a close friend. Someone who is willing to be your car loan cosigner — meaning they’ll apply for the loan with you — can give you a better shot at getting approved for the loan you want, with rates you can afford.
On this page
- Cosigning a car loan: pros and cons
- Why you might need a car loan cosigner
- How does cosigning a car loan work?
- Where to find auto loans with cosigners
- Frequently asked questions
Cosigning a car loan: Pros and cons
Having a cosigner can help you get approved for a loan, but it’s also a big
commitment. Here’s what you should consider before asking someone to cosign your loan:
Why you might need a car loan cosigner
Not everyone can get approved for a car loan on their own. Here are some of the reasons you might need a cosigner to help you qualify for a loan:
- Credit issues: Your credit scores are low, you have recent damage to your credit reports or you simply don’t have enough credit history.
- Employment history: You have recent gaps in your employment or your length of employment history is too short.
- Too much debt: In comparison to your income, you already have a lot of debt to pay. In other words, your debt-to-income (DTI) ratio is high.
If any of these situations apply to you, a lender might encourage you to find a cosigner before applying. Having a cosigner can help you get approved since it gives the lender a second person they can turn to for payments, reducing their risk of losing money on the loan.
Contrary to what you might have heard, a cosigner is not a character reference. The truth is that cosigners are required to take on all the same financial and legal responsibility for the loan as you.
Even if you plan to pay 100% of the car note by yourself, the lender can hold you both responsible for missed loan payments and late fees. And despite taking on the same liability as you, the cosigner doesn’t have the right to use the car without your permission.
A cosigner can, however, request billing statements and late notices from the lender.
How does cosigning a car loan work?
Being a cosigner is similar to applying for your own loan. Before accepting any offers, the cosigner should consider whether or not they can afford to cover the full cost of the loan payment each month, for the life of the loan, if you’re unable to pay.
If you’re both ready to take on the commitment, here’s how you can go about taking out a loan:
- Search for lenders: Start by looking for lenders who accept loan applications with cosigners.
- Get prequalified: See what you and your cosigner can prequalify for. Use lenders’ quotes to compare interest rates, terms and fees, and find the best offer available.
- Apply: Submit the required loan application documents for you and your cosigner, which will include both of your IDs, proof of income and more. You’ll each have to agree to a credit check, too.
If you’re approved, be sure to make a note of your payment due date, and take any extra steps that are required to set up your on-time monthly payments.
Your cosigner has to accept the same financial responsibility for the loan as you do. That means they have to sign the loan documents, and they agree to cover payments if you can’t foot the bill.
Here’s what your cosigner will be putting on the line to help you out:
- Credit risk: The auto loan will appear on both you and your cosigner’s credit reports. If you miss a car payment or if the car is repossessed, you could do major damage to your cosigner’s credit scores and cause them to be denied for loans and credit cards in the future.
- Financial risk: If you miss payments, the lender may go after your cosigner for the money, plus late fees, or even file a lawsuit against your cosigner to garnish their wages.
Keep in mind that these are the consequences you could both face if you miss your car payments. On the other hand, if you stay current on your car loan, both you and your cosigner are likely to see your credit scores improve.
Where to find auto loans with cosigners
Lots of lenders accept cosigners, so you may have trouble narrowing down your options.
For starters, try a banking institution where you already have an account. Credit unions and banks tend to offer some of the lowest rates on auto loans, and they may even give you a discount for being an existing customer.
You can also search LendingTree’s online marketplace to compare multiple lenders at once. You can even filter for specific features, like small loan amounts or loans for borrowers with bad credit.
Finally, you could go through a car dealership for in-house financing, but this should be your last choice since dealerships tend to have the most expensive auto loans.
Frequently asked questions
There’s no set credit score that you need to get a car loan. Some lenders may not have a requirement for your cosigner’s credit score, while others may want a minimum of 670. As a general rule, the higher the score, the better your chances for approval.
Having a cosigner can help reduce your car payment. If the cosigner helps you qualify for lower interest rates, your monthly payment could be lower. Alternatively, you can reduce your payments by spreading out the loan term over a longer number of years. Just beware that this strategy is far more expensive in the long-term, since it will cause you to rack up more interest charges.
If you want to qualify for a loan on your own, start by finding out what’s holding you back. Lenders may determine that you need to work on improving your credit, establishing your employment history, paying off debt or saving more for your down payment. You can also look for a lender with lower requirements to qualify, but it often costs more to borrow when you go this route.
It’s difficult, but not impossible to remove a cosigner from a loan. Your loan contract may have a clause that allows you to release the car loan cosigner under certain conditions, like after you’ve made a handful of on-time payments. If the lender doesn’t allow this, you could try refinancing your car loan or selling the car so you can pay back the loan early.