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How Does Co-Signing Work?

09.05.2025 / Jillianne West - AVP of Consumer Loan Operations
Loans

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A Playbook for Co-Signing on Different Loans

You’ve most likely heard of the term co-sign, but what does it really mean? This blog will break down the meaning of co-signing, what it means to be a joint or a guarantor, and how the process works for different loans. While each financial institution may follow a slightly different process, you can walk away feeling confident in your understanding of what co-signing is and how it impacts you if you decide to put your name on a loan.

What is a Co-Signer?

When you co-sign on a loan, you are equally responsible for the loan and its payments. Co-signers do not receive any funds from the loan, but they have the same legal responsibility to repay it.

What is a Guarantor?

When you sign as a guarantor on a loan, however, you are only responsible for paying back the loan if the primary borrower is in default.

While some financial institutions may handle co-signing differently, Community First uses the primary and the joint (guarantor) to decide credit on the application. Credit scores and income for each applicant are used to determine risk on the loan, and a combined credit bureau is pulled.

What is a Co-Borrower?

A co-borrower is different from a co-signer and a guarantor. A co-borrower is legally responsible for repaying the loan but may also have equal legal rights to the account. The co-borrowing relationship may be written differently on different types of loans. For example, an occupant co-borrower on a mortgage may be included on the title and have ownership interest in the home, while a nonoccupant co-borrower may not. Learn more about co-signing on different mortgages.

Understanding Co-Signing

There are two key things to understand about co-signing for a loan.

  • 1. What happens when you co-sign on a loan: The co-signer should be aware that he or she is taking on full financial responsibility, and that the loan may impact their credit score even if the borrower makes regular on-time payments. The co-signer’s debt-to-income ratio and ability to quality for other loans may be impacted.
  • 2. What happens if the loan goes into default: The co-signer is fully responsible for the loan from the time they sign their name. If the loan goes into default, both the co-signer and primary borrower are responsible for the balance, late fees and negative impact to their credit score.

How Co-Signers Can Prevent a Negative Impact on their Credit Score

While agreeing to co-sign for a loan or lease is a generous way of helping a family member or friend build credit, it is beneficial to know how to protect yourself. There are protective steps you can take before you sign, such as:

  • Be sure you understand the loan terms, payment due date, interest rate and amount, along with late fees and any other fine print associated with the loan.
  • Ensure you can repay the loan and afford the monthly payments if the borrower fails
  • Understand your rights about payment notifications, particularly notifications about late or missed payments.
  • Ask for copies of the loan documents.
  • Discuss with the borrower how he or she plans to make the payments.
  • Understand what options would be available to the borrower should they encounter financial hardship. (For example: forbearance on a mortgage, or an extension on a loan.)

Benefits of Co-Signing on a Loan

Aside from the potential risks, there are benefits to co-signing.

The benefits include:

  • As a co-signer, you are doing a good financial deed. Helping someone build credit and a solid financial future is a good thing. You may also choose to help someone with a low credit score who is trying to re-build their financial well-being.
  • It can help the borrower get a better interest rate.
  • With regular, on-time payments, the borrower and co-signer could see an improvement in their credit scores. On-time payments will contribute to your payment history and the presence of the loan could improve your credit mix, which could reflect positively on your credit. (source: Experian.com)

Co-Signing on Different Loans

Auto loans, credit cards, personal loans, and apartment leases are among the most common things people seek co-signers for, but even mortgages and student loans can have co-signers. Here is a brief breakdown of co-signing on different loans.

Co-Signing for a Car:

Lenders may have different requirements or fine print for co-signing on an auto loan, but in general, a credit score of 700 or above, a good debt-to-income ratio, and a stable income are some of the factors that may make someone a good co-signer. Just as with other loans, when co-signing on an auto loan, you will be responsible for the debt and will have to make the payments if the borrower does not. It is also important to note that as the co-signer on an auto loan, you would not have any ownership rights to the vehicle, unless you were specifically added to the title.

A guarantor may also be considered in place of a co-signer. A lender would determine when a guarantor is necessary, such as when an applicant has moved jobs frequently, or has been employed at their current job for a brief period.

The guarantor is only held responsible for payments if the loan defaults, and the sole purpose is to give the lender another source of repayment if the borrower defaults.

Co-Signing on a Credit Card:

A co-signer can help a person with a lower credit score get approved for a credit card. As with loans, credit card debt will become the responsibility of the co-signer if the borrower does not make payments.

While most major credit card issuers do not allow co-signers, some financial institutions, including Community First, allow for joint cardholders (co-borrowers), rather than co-signers. This allows each cardholder equal access and responsibility to the account.

A secured credit card offers another way to build credit. This kind of card is secured with a cash deposit which can be supplied by the borrower or a co-signer, and it helps reduce the risk for the card issuer if payments are not made.

Becoming an authorized user on someone else’s credit card could also help someone build credit. An authorized user would get their own card with their name on it, but the account holder is responsible for paying the balance. The flipside of being an authorized user, is that if the main account holder makes late payments, or misses payments, it could reflect negatively on the authorized user’s credit report.

Co-Signing on a Mortgage:

If you have trouble qualifying for a mortgage on your own, you can seek a nonoccupant co-signer or nonoccupant co-borrower. A lender has the right to hold the nonoccupant co-signer or co-borrower responsible for home loan payments even if they do not live in the home.

The primary difference between the two is that a nonoccupant co-signer doesn’t have ownership interest in the property while a nonoccupant co-borrower may or may not have ownership interest. If you have an occupying co-borrower however, that person’s name will appear on the title and this person has equal responsibility to repay the loan.

Co-Signing on Different Types of Mortgage Loans:

Co-signers are most commonly used on conventional loans and FHA loans. Getting a co-signer on a conventional mortgage loan means they will need to sign and agree to make payments if the borrower does not, but they do not need to be on the title or live in the home.

For an FHA loan, which is a government loan backed by the Federal Housing Administration, there are more rigid requirements for co-signing.

These requirements are:

The co-signer must be a relative or close friend. If they are a close friend, the applicant must write a letter to the lender and explain why the friend wants to co-sign. The following are considered eligible relatives to co-sign:

  • Parents and grandparents (can include step, adoptive and foster)
  • Children (can include step, adoptive and foster)
  • Siblings (can include step, adoptive and foster)
  • Aunts and uncles
  • In-laws
  • Spouses or domestic partners

Additional requirements of co-signers of FHA mortgages:

  • They must live in the United States for the majority of the year
  • They must have a DTI of 70% or lower if you have less than 20% down payment
  • Their name must be on the title

Co-Signing on a Personal Loan:

Generally, co-signers can be sought for personal loans (also called unsecured loans). To improve the opportunity to obtain favorable loan terms, general guidelines recommend that a co-signer should have a credit score of 700 or higher, a debt-to-income ratio of around 30%, and a steady income. Co-signers are equally responsible for the debt of a personal loan as the borrower. Each lender has different underwriting requirements, however. It is beneficial to contact your preferred lender to understand their requirements for co-signing on loans. Credit unions like Community First, for example, are member-focused and often have more favorable lending that can benefit borrowers.

Financial Wellness with Community First

Co-signing has pros and cons for the borrower and the co-signer. Before seeking a co-signer, it is important to understand the responsibility it brings, and its potential impact to each person’s credit. If you are seeking ways to build or improve your credit, Community First Credit Union can help. Our MoveUp and BALANCE programs offer useful tools that help you improve your financial wellbeing. Our team is also available to answer questions and point you toward the right financial tools and products. Contact Community First to get started on a better financial future!
 

Learn More With Community First

 

*All information contained in this blog is for informational purposes only. The credit union makes no representations as to the accuracy, completeness, suitability, or validity, of any information. The credit union is not responsible for any errors, omissions, or any losses, injuries, or damages arising from its display or use. All information is provided AS IS and with no warranties and confers no rights.

The credit union is not responsible for material that is found through non-credit union links posted on this blog site. Ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

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