Does co signing affect my ability to borrow

June 28, 2013  -- If you've ever been asked by a friend or family member to cosign on a loan, you might have wondered whether it could hurt your credit. This is a very important question to ask, and it's a decision you have to weigh carefully, as the effect of cosigning a loan can vary with each situation.

Índice Show

Compelled to Cosign
Minding Your Own Mortgage
Risk Without Reward
More Potential Effects
How does cosigning a loan affect me?
What are the disadvantages of cosigning?
Does co signing affect debt

In a strict sense, the answer is no. The fact that you are a cosigner in and of itself does not necessarily hurt your credit. However, even if the cosigned account is paid on time, the debt may affect your credit scores and revolving utilization, which could affect your ability to get a loan in the future.

For example, let's say the cosigned account is a credit card. If your friend carries a large balance, as the cosigner you may have lower credit scores because of the high revolving utilization of the cosigned account.

Read more: Can You Really Get Your Credit Score for Free?

Here's another example, a worst-case scenario. Let's say you cosign for a friend on an auto loan. If your friend stops making payments, the delinquency or repossession records would damage your credit score. You would be held legally responsible for repayment of the cosigned debt

In the sense that the cosigned account may give you a greater diversity of credit accounts (one of the components of credit scores), it's actually possible that the cosigned account could help you get a loan in the future. For example, you would probably benefit if the cosigned account were a mortgage that is paid on-time every month.

Read more: 5 Credit Rules Everyone Should Follow

If you're having trouble deciding whether to cosign, think about what likely effect the cosigned account will have on your credit scores. If you're at all concerned about your friend or family member's ability to pay, and are not in a position to cover all of his debt in the event that he starts defaulting, don't cosign. It is best to only cosign with a close friend or relative that you know is trustworthy.

The 11 Most Common Credit Questions

Remember: The cosigned account will affect your credit report and scores no matter what because ultimately you are just as responsible for the debt as your friend or family member. If you are a cosigner on someone else's account, it's very important that you check your credit reports (you can get them for free once per year from each of the three major credit reporting agencies through AnnualCreditReport.com). And by monitoring your credit score regularly -- which you can do for free once a month using Credit.com's Credit Report Card -- any unexpected changes in your score could point to potential problems with that account. By being aware of potential problems with the cosigned account, you'll be better able to help prevent even greater damage to your credit.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Cosigning a family member's mortgage loan can diminish your ability to finance your own home. The lender on the cosigned mortgage reports the account to the credit bureaus, alerting potential lenders of your obligation. Cosigning also places your credit at risk should the borrowers miss payments. You can minimize the risks of cosigning a mortgage by monitoring the borrower's payment activity and specifying in writing an end-date for your cosigning responsibility, which involves a refinance.

Compelled to Cosign

Lenders typically require that a cosigner have a longstanding, family-type relationship with the primary or co-borrower. Common cosigner scenarios involve parents helping their adult children become homeowners, or an otherwise more financially-established relative with excellent credit helping a less financially capable borrower. Borrowers must meet a lender's credit score requirements; however, insufficient income or high monthly expenses can make debt-to-income ratios difficult to meet. Also known as DTI ratios, these ratios compare monthly housing and recurring debts to gross monthly income. A cosigner's income can supplement a borrower's income and provide the boost needed to meet minimum DTI requirements.

Minding Your Own Mortgage

Cosigners seeking a new mortgage to buy or refinance a house can hurt their ability to qualify for a higher loan amount, or even to qualify at all. For example, a cosigner who normally could have qualified for a $200,000 loan might have reduced borrowing power and qualify for only $100,000 because of an outstanding $100,000 cosigned loan. Missed payments on a cosigned loan or a foreclosure on the mortgage can prevent a cosigner from obtaining financing altogether for a period of time.

Risk Without Reward

The cosigner takes on the risks of owning a home without the rewards of home ownership, as cosigners -- unlike co-borrowers -- don't take title to the property. Even if a borrower makes payments on time for the cosigned loan, the cosigner's potential mortgage lender can count the monthly payment of the cosigned loan, increasing the cosigner's DTI ratios. Lenders typically prefer housing DTI ratios of about 30 percent and total DTI ratios in the 40-percent range. A cosigned payment that tips DTI ratios beyond these benchmarks hurts the cosigner's chances of getting a desired loan amount or better loan terms.

More Potential Effects

If the cosigner has sufficient income to get another mortgage despite the cosigned liability, he may not get as good of a deal. Lenders base a borrower's mortgage rate partially on the DTI. A higher DTI usually means a higher interest rate, especially if the DTI exceeds the lender's benchmark ratios but otherwise still qualifies. A cosigned mortgage has little to no impact on cosigners with substantial income and DTI ratios well-below the lender's maximum DTIs, as they can comfortably qualify for a loan despite their debts.

How does cosigning a loan affect me?

How does being a co-signer affect my credit score? Being a co-signer itself does not affect your credit score. Your score may, however, be negatively affected if the main account holder misses payments.

What are the disadvantages of cosigning?

Possible disadvantages of cosigning a loan.

It could limit your borrowing power. Potential creditors decide whether or not to lend you money by looking at your existing debt-to-income ratio. ... .

It could lower your credit scores. ... .

It could damage your relationship with the borrower..

Does co signing affect debt

Cosigning increases your debt-to-income ratio For all intents and purposes, it's as if you applied for the loan and borrowed that money. One reason that's important is because it increases your debt-to-income (DTI) ratio. Your DTI ratio is your monthly debt payments divided by your gross income.