Published: April 5, 2016 • Last updated: July 24, 2019 at 11:52 am
I met a couple recently who want to refinance their house to pay off some debts. Their home is worth $900,000 and their current mortgage is $450,000, so with lots of equity to play with you would think this will be really easy. The debts total around $40,000.
After gathering all their personal information, we pulled their credit reports from Equifax to submit to the lender. Everything was fine except his credit score was only 542. (For mortgage financing, a score above 620 or so is desirable. Ideally your score is 700 or higher.)
I reviewed the contents of his credit report and found a $6,000 student line of credit with several recent late payments. In fact it is currently 60 days late. He shook his head ruefully and explained he had co-signed for his son a few years ago and his son was forgetful and often neglected to make regular payments.
Otherwise the credit report was fine. But with this glaring blemish on his credit report, no “A lender” will refinance their mortgage or give them a Home Equity Line of Credit to cover their own debts.
Their only chance now is to take out a private second mortgage; cover ALL the debts, and when their score increases sufficiently in six months or so, only then can we properly refinance their mortgage.
This happens much more than you might think. Most people do not understand when you co-sign a loan product (even a cell phone contract!) you are effectively handing over your credit history to the borrower.
The silver lining here is we caught this now before things got even worse.
If you are sure you wish to co-sign for anyone, you need to think in advance:
- Be sure the arrangement is such that you have complete access to the debt’s monthly statements. That way, you will know immediately if the arrangement is going off the rails.
- Be sure you have the resources to step in and make payments if the borrower shows signs of not being able or willing to do so themselves. That way, you can at least protect you credit history.
- If you cannot do both those things, you had better be completely sure the borrower will never mess up. Because you have given them far more than your scribbled signature – you have taken on full personal liability for the debt.
Do you have questions about co-signing? Ask Ross how he can help.