The Risks of Co-Signing a HELOC
If a borrower does not qualify for a HELOC on his own, he may still be approved for the home equity loan if he has a co-signer. A co-signer is a more creditworthy person who essentially vouches for the primary borrower. By co-signing for a HELOC loan, you are saying: “If the borrower does not pay back the HELOC, I will do it for him.”
There is always risk involved with co-signing a HELOC. Make your decision carefully.
How Co-Signing Can Affect You Now
Even if the primary borrower makes all payments on time, there are still a few ways that co-signing can impact your financial situation. First, the HELOC may show up when future lenders calculate your debt-to-income ratio. If the HELOC pushes your ratio above the acceptable number, you may have a very difficult time obtaining financing for future home and car purchases. You may not qualify for traditional loans or you may need to accept a higher interest rate than you normally would. Note that some lenders will waive this issue if the primary borrower has made all payments on time – however, there is no guarantee that your lender will agree to this.
Second, your credit score may go down temporarily. The required credit inquiry and the higher debt-to-income ratio will probably have an effect on your score, making it difficult for you to qualify for competitive interest rates.
Consequences of a HELOC Default
If the primary borrower does default on the HELOC, the co-signer faces some serious problems:
- You may have to pay the loan back yourself. As a co-signer you have already agreed to this possibility and the lender may seek money from you by constant calls, lawsuits, or wage garnishments. You may be held responsible for the unpaid money (plus late fees) even before the lender requests foreclosure proceedings.
- Your credit score may be damaged significantly. If the loan goes into default, it will be recorded on your credit score. For the next seven years, you may find it extremely difficult if not impossible to take out additional loans or even apply for credit cards.
Agreeing to Co-Sign a HELOC
If you decide to co-sign for a HELOC loan, make sure you know your rights and responsibilities. Keep a copy of everything you sign. You should also meet with the primary borrower to discuss how the arrangement will work. Will you have access to the online account? How will you be notified if anything goes wrong? Determining these details in advance will help you avoid problems in the future.
Declining to Co-Sign a HELOC
Should you decide that co-signing is too risky, you may want to suggest a few alternatives to your friend or relative. He may be able to qualify for the HELOC on his own by making changes such as paying down credit card debt or taking a steady job. He may also be able to take out a NINA (no income, no asset) HELOC or may qualify for a hard money home equity loan. (See: How to Qualify for a HELOC).
When making this difficult decision keep in mind that co-signing for a HELOC is always a risk. There are only two ways to ensure that your credit cannot be affected: have the entire amount of the HELOC credit limit in your savings account or decline the request to co-sign.
See Also: How a HELOC Works