It is sometimes very difficult to get approved for a home loan (especially if you have bad credit or a past bankruptcy on your credit report). Even though home loans are secured loans there are certain requirements that you still need to meet to get approved. A co-signer can help you in this process since it provides the lender with an additional guarantee.
The main requirements lender’s focus on are income and income to debt ratio. However, your credit score will also be an issue, though not such an issue as with personal unsecured loans. Thus, even if you have a terrible credit score, a co-signer with a good credit score can aid you in getting approved.
How Does A Co-signer Aid Approval?
A co-signer can contribute to meeting the necessary qualifications for loan approval. For starters, a co-signer with a good credit score can compensate for the main applicant’s lack of credit. This implies that the co-signers credit report will be pulled during the qualification process and that both the applicant’s credit score and the co-signer’s credit score will be taken into account when deciding whether to approve the loan or not.
Moreover, even though the income required for repaying the loan must be met by the main applicant, if the monthly payments do not leave enough space for other expenses due to a reduced income, the lender may decide to decline the loan. When applying with a co-signer, the lender knows that even if something unexpected happens, the payments will be made because the co-signer is also obliged with his income and assets to repay the loan if the applicant fails to do so.
Acting As A Co-signer – Dangers
Acting as a co-signer has its consequences too. Given that by signing the loan contract a co-signer obliges himself to repay the loan in case the main applicant doesn’t honor his debt, the co-signer’s credit report will also show that a new debt has been taken and that will reduce the co-signer’s ability to get finance.
Moreover, if the co-signer offers a particular asset as collateral for the loan, he risks repossession just like the main applicant and sometimes, depending on the redaction of the loan contract, the lender can take legal action against the co-signer first rather than going for the main applicant initially and then taking legal action against the co-signer. Therefore, before acting as a co-signer, these dangers have to be considered carefully.
Alternatives For Aiding Approval
If offering a co-signer is not possible or not desired by the main applicant, there are other measures that can be taken in order to ensure approval. Making a down payment instead of requesting 100% finance can show the lender that you have saving capacity and thus are to be trusted. If you can improve your credit score by avoiding late payments or missed payments prior to applying, you can save yourself a lot of hassles too. After all, the lender is looking for the smaller risk possible and by showing that your credit behavior has improved, you are providing security.