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Tom Kelly: Looking for a quick credit fix? Co-signer usually not the answer

If your credit history is atrocious and you spend money long before you get it, having someone co-sign your home loan is not going to solve your problems – unless they plan to move in with you.

Co-signers, or co-borrowers, can help bring you up to the income needed to qualify for a loan, but guidelines can be very specific depending on the type of loan. Usually the key word is “occupancy.”

According to mortgage professionals, a co-borrower will not make bad credit good. People are often mistaken that the co-borrower’s credit will solve the credit problems for the person planning on living in the home. If the person who is going to occupy the home has lousy credit, lenders don’t care how strong the co-borrower’s credit is.

The days of finding a friend to co-sign for a loan at the neighborhood bank are long over. All people who sign on the line are now deemed co-borrowers and are responsible for repaying the debt. Co-borrowing is a big commitment, and people need to take it seriously.

Consumers need to be especially careful when entering into any contractual obligation. Even when parents agree to be co-borrowers for their children, the folks need to understand they are not off the hook until the loan is repaid. It’s probable that if the kids are late on a few payments, it will show up on the parents’ credit report.

Most loans are sold in the secondary market where Fannie Mae and Freddie Mac are still the two biggest players. Both require the co-borrower occupy the home if the down payment is less than 10 percent of the purchase price. The co-borrower does not have to occupy the property if the down payment is more than 10 percent, provided the co-borrower does not have a vested interest in the transaction (real estate agent, developer, etc.).

Cosigned loans insured by the Federal Housing Administration can be for up to 97 percent of the purchase price of a property as long as the co-borrower is a relative of the borrower-occupant. If the co-borrower does not occupy the house and is not a relative of the borrower-occupant, FHA requires a 25 percent down payment.

FHA will consider allowing a person with a long-standing family relationship to act in the role of a family member in specific situations. For example, a dairy farmer recently co-borrowed for one of his employees. The employee’s parents had passed away and the farmer had been caring for the employee for some time. FHA approved the loan with the farmer being considered a family member.

Loans guaranteed by the Department of Veteran Affairs are even more stringent with co-borrowers. Since VA loans are based on the veteran’s “entitlement,” only the income provided by the borrower and their spouse will be considered, or the income provided by another veteran occupying the home.

Other situations often arise for unmarried couples looking for homes and loans. Some have come out of previous situations that have put them in a tough financial spot. Lenders look at all parties to the loan as one entity, so some pluses can offset some minuses.

What consumers sometimes forget is that lenders need them as much as they need lenders. If a bank doesn’t make loans, it will not make money. And lenders do not want to get properties back through foreclosure, so they try to insure their bets by making everybody signing for the loan responsible.

If you are going to lend a helpful hand in a home loan, be prepared to follow up and make sure all payments are made on time. And if it is your intention to get out of the deal at a certain time or when the home appreciates to a certain level, have the borrower-occupant refinance the loan on his own.

Just remember that if you cosign, you can’t plan to walk away until your name is clear.

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