When do i need a co-signer? The ins and outs of having one
So you’ve just applied for a new apartment, but the rental office tells you that you’ll need a co-signer to sign your lease and move in. Why is this happening? Let’s explore the ins and outs of having a co-signer.
What is a co-signer?
A co-signer is someone who has agreed to take responsibility for your payments in the event of a loan default or rent default. Your co-signer will then be legally responsible for these payments, and failure to do so could also cause long-term damage to their credit. Since banks and homeowners know these people are financially responsible, they will accept co-signers to make sure they get paid.
Why do i need a co-signer?
When you apply for a loan, apartment or mortgage, two main factors are considered by the lender or owner: your income and your credit report.
If your reported income or credit score is below a set threshold, a lender or landlord will usually ask you to find a co-signer. This gives them the peace of mind to lend you money or allow you to move into one of their properties as it reduces the risk of default.
- Credit: Credit scores exist on a scale generally ranging from 500 to 800, or sometimes up to 900, depending on the formula used. Any score above 700 is generally considered a good credit rating, but there are many factors that can affect this number. If your score is below 700 and your income is not sufficient, you may be asked to bring in a co-signer.
- Returned: Income is a major factor in determining your need for a co-signer. For example, when you rent an apartment, many property management companies require that your rent not cost you more than a third of your income. If the lease you want to sign exceeds this amount, they may ask you to find a co-signer.
Who can be my co-signer?
Virtually anyone with a good credit rating can be your co-signer, but you need to be careful who you ask. Family members are usually a good place to start, especially for young adults who want to take out private student loans or move into their first apartment. Be warned, however, that defaulting on a loan can cause irreparable damage to your relationship with your co-signer.
There are two things to consider before asking someone to co-sign a loan for you:
- Can I avoid taking out this line of credit? If you can avoid getting a line of credit altogether, you should do so until you’re in a better financial situation and can qualify for it on your own.
- Can I wait to take out this line of credit? If you can’t avoid taking out the line of credit, can it be postponed for a few months? If so, there are a lot of things you can do to fix your credit in the meantime, and maybe avoid having to ask your Uncle John to be your co-signer.
How can I repair my credit enough so that I don’t need a co-signer?
If you can wait to withdraw your line of credit or move into this apartment, take the time to repair your credit. Here are a few ways to do it in a short time:
- Pay off the debt: An easy way to increase your credit score is to pay off some unpaid debt. If you have credit cards with small balances, pay them off if you can.
- Open a low limit credit card: It may seem counterintuitive to open MORE credit if your credit is bad, but opening a card with a very small limit can help in the long run, as long as you pay it off monthly. This is because it lowers your debt utilization rate. You may be able to put a tank of gas on this card each month and pay for it as soon as the statement arrives.
- Choose a secondary activity: A second job would definitely give you an increase in your income, possibly eliminating the need for a co-signer as it increases your debt to income ratio.
- Request to be placed on someone else’s account: If you have generous parents, grandparents, aunts, or uncles with good credit, consider having one of them add you to a long-standing credit card (instead of becoming your co-signer ). They don’t need to give you a card, but it will still show up on your credit report, giving you an almost immediate boost.
If you end up getting someone to co-sign a loan or an apartment for you, there will come a day when you can release them. Each lender or owner will have different requirements to release a co-signer, but it can usually be done after a certain period of time, as long as your account has remained in good standing and your payments are all made in full and on time.
When you sign your loan or lease documents, there may be a provision to drop the co-signer, which you should do as soon as possible. If there is no provision, ask your lender about it. If they can’t afford to let you down on the co-signer, and that’s something that’s important to you, you may need to find a new lender or explore possible refinancing options down the road.
So when you are ready to apply for a loan or a new apartment, and you need a co-signer, you now have a better idea of what that means, both for you and for the person agreeing to be. legally responsible for your outstanding debt.
Josh is the Content Manager at Credit.com. He works with leaders and experts in the credit industry to create educational and timely articles that consumers can use to make more informed decisions. More from Josh Smith.