How Co-Signing for a Student Loan Can Affect a Home Loan Application

Making an arrangement for co-signing for a student loan can reduce the expense of the loan for the student. Many students have insufficient credit histories due mostly to their young age. Further, they do not have incomes. Lenders will shy away from these loans because they pose such a large risk. One way to assure against this risk is for a parent, relative or other associate to cosign on the loan. This is a way for the student to "borrow" someone else's good credit. In the future, though, this has an impact on the way both individuals will be able to achieve home loans.

For the Co-Signer

The individual who agrees to cosign on the loan is doing the student a huge favor. However, this person is accepting a large amount of risk; cosigning should not be taken lightly. A cosigner should screen the individual to understand how well he or she understands credit and loans. It may be a good idea to make sure the student takes a personal finance course prior to taking on the loan. Whether the loan is paid off or not, the cosigner's credit will be affected.

If the loan defaults: If the student defaults on the loan, the cosigner may be called on to pay it off in full. This may not be possible for some people, and that means the default will go against both people's credit history. If the cosigner goes to apply for a home loan within the next 5-10 years, he or she will have to explain this credit dip and default score.

If the loan is not paid off yet: When a cosigner goes to apply for a home loan before the student loan is paid off, the student loan debt is still on his or her record. This means the lender may fear the borrower has too much debt and refuse the loan.

For the Co-Signee

Having a cosigner on your loan is not all benefit and no drawback. There are several issues that will arise from the fact you have a cosigner that can make the option less attractive.

Less credit benefit: You want to start building your credit as soon as possible. As you saw with your student loan, it is not easy to get funding without a long loan history. Student debt is a good place to gain your status as a healthy borrower. When you have a cosigner, you do not get as much benefit from making loan payments. You are actually splitting the credit boost with your cosigner. When you apply for your first home loan, you will not have the record of this successful loan to show your ability.

Less independence: Many people do not realize the importance of flexibility in a loan when they first sign a contract. Student loans begin when you are in your early twenties but may not be paid off until your early thirties or later. Your financial situation will change drastically in that time, and you may want to modify the loan as a result. If there is a cosigner on the loan, you cannot modify it without that person's approval.



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