Banks and lenders approve loans based on the applicant's credit history, credit rating and income, among a few other factors. If the applicant is denied credit approval by the bank, he can re-apply with a more qualified cosigner to obtain the loan. When applying for a home equity loan with a cosigner, the cosigner does not need to be on the deed to the property.
Home Equity Loans
Properties generally appreciate in value over the course of time. The $100,000 house purchased 25 years ago may be worth $150,000 today. The value that builds in the property during ownership is called equity. As time goes on, the mortgage balance is reduced and the value of the home increases. Many homeowners use the equity in the property to finance other purchases, such as home improvements, a new car or paying for the children's college education. A home equity loan can be taken out against the equity value. Home equity loans, or second mortgages, are similar to the first mortgage loan. However, the amount available is directly based on the equity gained since the home was first purchased. Similar to a home equity loan is a home equity line of credit, or HELOC. The difference between the two is simple. A home equity loan pays one lump sum, while a HELOC remains as an open line of credit for a set period of time. Home equity loan payments work in a similar fashion to mortgage loan payments.
Although your home may have a great deal of equity built up, you will have to go through the application process with the bank or lender for the home equity loan. They will review the application just as they would for a first mortgage loan. If your credit score is below the lender's standards or your income is not sufficient enough to maintain payments toward the loan each month, and you are unable to qualify for a home equity loan alone, the bank may suggest re-applying with a qualified cosigner.
A cosigner is used to increase the income and credit rating on the application for a home equity loan. By using a cosigner, the bank can be assured that both you and the cosigner will be responsible for paying the loan back as agreed in the terms and conditions. The cosigner should preferably have a better credit score and earn more income than you do. Other than that, there are not strict guidelines for cosigners. The person cosigning for the loan does not need to be listed as an owner on the deed to the property. The cosigner can be a relative, spouse or friend as long as he meets the credit standards of the bank or lender. In addition to helping the borrower to gain approval, cosigners can also help borrowers achieve lower interest rates.
Cosigning a loan is a serious commitment. By cosigning the loan, you are not taking the loan out for yourself, but you promise to repay the loan if the borrower cannot. Cosigning a loan may impact your credit score negatively. The home equity loan may raise your debt-to-income ratio. Although the debt isn't technically yours, it still appears on your credit report. This may affect your ability to borrow money for yourself in the future. Caution should be taken before cosigning a loan for anyone.
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