Parents and family members may think they are simply lending a helping hand by co-signing a car loan, a mortgage or credit-card application. But they are, in effect, agreeing to pay back the debt themselves — and they often end up doing so. As your lender - we have to count the full monthly payment when calculating the DTI ratio.
When someone asks you to co-sign a loan, consider his or her track record in paying back debt on time. Here are some questions and answers about co-signing a loan:
Q: Can co-signing a loan affect my credit rating?
A: Yes. Even if the borrower repays the loan on time, the loan typically will appear as an obligation on your credit report. That means lenders will consider that liability when you apply for a loan yourself. If the additional loan makes your overall debt appear high compared with your income, you may end up paying a higher interest rate on your own loan.
Q: Can I remove myself as a co-signer?
A: Once you co-sign a loan or credit-card application, it’s difficult to get out of the commitment, especially if there have been any late payments.
It’s highly unlikely the lender would allow you to change that contract, since the reason a co-signer is required is to reduce the lender’s risk.
One possible way to extricate yourself from a co-signer obligation on a car loan or mortgage is to have the borrower refinance the loan solely in his or her name. Credit cards are more difficult, but it’s possible that once the card is at a zero balance, you could ask to be removed from the account. The card company can then decide whether to allow the main cardholder to remain as the sole name on the account, or whether to close the account and have the borrower reapply for a card separately.
Some private student lenders promote the option to have co-signers released from their obligation after the borrower meets criteria like making a year or more of on-time payments. But in practice, it can be difficult to obtain a release on a student loan, according to the Consumer Financial Protection Bureau.
Q: How can I protect myself as a co-signer?
A: The Federal Trade Commission suggests that you try to negotiate specific terms of your obligation before agreeing to co-sign. For instance, you can ask to limit your liability to the principal on the loan, and exclude any extra costs like late fees or court costs.
If you’re successful, ask the lender to include a statement in the contract. For instance, the Federal Trade Commission suggests this language, “The co-signer will be responsible only for the principal balance on this loan at the time of default.”
After you co-sign the loan, you should stay in touch with the borrower to make sure payments are being made on time. If that’s not possible, you can contact the lender to verify the loan’s status, he said. You can also check your credit report periodically, to see if any late payments have posted. Do this every three to six months.
Effective Jan. 10th 2014 - the new federal rule of Ability to Re-pay (ATR) and Qualified Mortgage (QM) threw another twist to mortgage lending. Borrowers need to pass QM test in order to obtain home loans backed by Fannie and Freddie. QM is further divided into General QM and Agency QM. The tests are so stringent that experts predict one in five borrowers will be ineligible due to QM test.
Under Agency QM - loans may still be originated with Automated Underwriting System (AUS) approved status even though it may fail the DTI test. Interest only and loans greater than 30 years are not eligible under the QM rule.
Ability-To-Repay (ATR) - It means that lenders have to look at more documents proving a borrower's income, assets, credit history, monthly expenses and employment situation (like we haven't already). The idea is to keep homebuyers out of mortgages that they can't afford.
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