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Torang Nazmi's Blog

By Torang | Save $10,000's | Broker in 75063

Can a Co-signer in a Home Purchase Affect Credit Scores?

Impact on Co-signer

When a lender approves a borrower's mortgage loan, the mortgage account appears on the borrower's credit report. This entry updates every time the borrower makes or misses a payment. If you co-signed the loan, you are just as responsible for payment as the borrower, and the entry appears on your credit report as well. Provided the borrower makes all of his mortgage payments in a timely manner, your credit scores won't suffer as a result of co-signing. If the borrower misses payments, however, the loan's entry on your credit report will also reflect these missed payments – causing your credit score to suffer.

Impact on Borrower

Like the co-signer, the borrower's credit report will reflect the mortgage loan and its payment history. The subsequent payments or lack thereof then serve to either improve or damage the borrower's credit scores. After the documents are signed and the loan closes, the co-signer's responsibility to the borrower ends. Thus, the co-signer's actions have no effect on the borrower's credit rating. Only the borrower and the payments he does or does not make have the ability to impact both parties' credit scores.

Future Purchases

If you act as a co-signer, having the borrower's mortgage loan appear on your credit report can threaten your future purchasing power. If, for example, you apply for your own mortgage in the future, your mortgage lender would review your credit and include the borrower's home loan as one of your financial obligations. The additional obligation reduces the amount you qualify to borrow.

Liability

As the co-signer, you must cover the mortgage balance if the borrower stops making payments. If you cannot make the mortgage payments, the lender will foreclose on the home. Because the mortgage loan appears on your credit report, any resulting foreclosure will as well. A foreclosure deals your credit rating a significant blow and can cost your score anywhere from 100 to 300 points.

Time Frame

It is a common misconception that all credit entries vanish after seven years. Although federal law dictates that the majority of negative entries must not remain on your credit report for longer than seven years, accounts that are open and current – such as the mortgage loan you co-signed – will remain a part of your credit history until ten years after the borrower pays off the mortgage, refinances or sells the home. If the borrower loses the home to foreclosure, the mortgage account becomes a negative, rather than positive, entry. As such, the credit bureaus will remove it after seven years.

source : http://homeguides.sfgate.com/can-cosigner-home-purchase-affect-credit-scores-50839.html

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