Co-signing a loan or lease: the risks before you sign

When someone in your family cannot qualify for a loan or a lease alone, it is common for them to ask you to sign as a co-signerco-signerA co-signer is a person who signs another person's loan or credit account to back it up, and by doing so becomes responsible for the debt. If the borrower does not pay, the creditor can collect up to the full debt from the co-signer, plus late fees or collection costs, without first trying to collect from the borrower, and the default may become part of the co-signer's credit record. A federal FTC rule calls for the co-signer to get a written notice explaining these risks before signing. On a mortgage, according to Fannie Mae, a co-signer signs the note and shares liability for the debt with the borrower but has no ownership interest in the home on the title.See the full definitionClose. This guide is for you before you decide, or if you already signed: it explains what you commit to pay, how it affects your credit and a future mortgage, what cannot be required of you and how to protect yourself.

Of the debt you can be made to pay if the borrower does not, plus late fees or collection costs

The full amount⁵

Student loan co-signers made at least one payment for the borrower, according to a survey cited by the CFPB

1 in 4⁸

Of on-time payments by the other person for a mortgage lender to be able to leave that debt out

12 months¹¹

What co-signing means

According to the CFPB, a co-signer is someone, such as a parent, relative or friend, who adds their income and credit record to another person’s loan application so they qualify or get better terms. In return, the co-signer promises to pay if the primary borrower does not.¹

Why are you being asked? Being told you need a co-signer generally means the lender will not offer the loan based solely on the applicant’s own income and credit. A co-signer with good credit helps them qualify or get a lower interest rate.² In other words, the lender is counting on your credit and your money.

The key point: you are as responsible as the borrower, even if you do not have the same rights to what was bought. On a car loan, the co-signer is responsible for the loan even if they never drove the car.² On a mortgage, Fannie Mae describes guarantors and co-signers as people who sign the promissory notepromissory noteThe promissory note (or simply the note) is the document you sign at closing to promise you will repay the loan to the lender. It describes what you are agreeing to: how much you owe, the interest rate, the payment dates, the total you will pay, the length of the loan, whether the payments can change and where to send them. It is separate from the mortgage or deed of trust, the document that gives the lender the right to take the home if you do not pay. Some terms, such as a prepayment penalty, may be in an addendum to the note. You can ask for copies of the documents before closing to review them.See the full definitionClose and are jointly liable for it with the borrower, but who are not owners on the title.¹³

The law does not depend on what the paper calls you. Under the FTC rule on credit practices, you are a co-signer if you become responsible for someone else’s debt without getting anything in return, including when your signature is requested as a condition of giving them credit, whether or not the document says so.⁶

Primary borrower and co-signer, side by side

Who receives the loan

Primary borrower

• Is the one applying for the loan to buy the car, the home or something else.¹
• Is the one who has to make the payments on time.⁷
• Their late payments affect their credit and yours.⁷

Who guarantees payment

Co-signer

• Does not necessarily have rights to what was bought, and is not an owner on the title.¹³
• Is equally responsible: can be made to pay the full amount, plus fees.⁵
• Can be pursued by the creditor without the borrower being pursued first.⁵

Signing as a co-signer means accepting that, if the other person does not pay, the debt is yours.⁵

What you can be made to pay

The FTC requires that, before you become obligated, the lender or retail installment seller give you a separate document called the “Notice to Cosigner.”⁵ That rule applies to lenders and retail installment sellers within the FTC’s jurisdiction.⁶ In short, the notice says:⁵

• You are being asked to guarantee this debt; think carefully. If the borrower does not pay, you will have to.
• You may have to pay up to the full amount of the debt, plus late fees or collection costs.
• The creditor can collect from you without first trying to collect from the borrower, using the same methods: suing you, garnishing your wages and others.
• If the debt is ever in default, that may become part of your credit record.
• This notice is not the contract that makes you liable.

With a car loan, if no one pays, the lender may repossess and sell the car and, depending on your state’s law, sue you and the borrower for what is left.¹ With a private student loan, lenders often hire collection agencies to collect from the co-signer, and the co-signer can also be sued.⁷ If a debt collector contacts you, you have rights: our debt collection guide explains them.

The CFPB cites a 2019 survey that found a quarter of student loan co-signers ended up making at least one payment because the borrower did not.⁸

How it affects your credit

Late or missed payments on a co-signed loan affect both credit histories: yours and the borrower’s.⁷ They can appear on your credit reports and lower your scores, which makes it harder to get credit later.¹ If the loan defaults, it goes on your credit reportcredit reportA credit report is a statement that has information about your credit activity and current credit situation: your loans and cards, the balances, whether you have paid on time, accounts in collection and who has checked your credit. Credit reporting companies, also called credit bureaus, compile it from what banks and creditors report; your credit score is computed from it. When you apply for a mortgage, the lender pulls your report from the three bureaus. You have the right to see it for free and to dispute anything that is wrong.See the full definitionClose just as it does on the borrower’s.⁸

To find out in time, the CFPB suggests asking the lender to send you the monthly statements or give you online account access,¹ talking with the borrower when payments start and checking your credit report.⁸ Our guide on how to read your credit report shows you where each account appears.

If you later want to buy a home

Here is a risk many families do not see coming. When you apply for a mortgage, the debt you co-signed generally counts as yours in your debt-to-income ratio (DTI)debt-to-income ratio (DTI)Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income, that is, income before taxes. If you pay a certain amount each month across a car, cards, student loans and the mortgage you are asking for, and you earn three times that, your DTI is one third. Lenders use it to measure whether you can manage the payment; each loan type and lender sets its own limit, and assistance programs usually publish theirs. Paying down debt before applying improves your DTI.See the full definitionClose.

• FHA loan. HUD Handbook 4000.1 calls co-signer debts “contingent liabilities.” The lender must include that monthly payment in your obligations unless it documents that the creditor cannot pursue you if the other person does not pay, or that the other person has made 12 months of on-time payments.¹¹
• Conventional loan (Fannie Mae). If you are obligated on a non-mortgage debt but are not the one paying it, the lender may leave that payment out of your DTI. For that it needs the most recent 12 months of canceled checks or bank statements from the person paying, with no late payments.¹²

Example with real numbers

How a co-signed loan counts in your DTI

An example in words, using the FHA and Fannie Mae rules.

Your own monthly debts

Counted, as always

Payment on the loan you co-signed

Added to your debts

If the person paying has 12 months on time and it is documented

The lender may leave it out

Your debt-to-income ratio (DTI)

Higher while that payment counts

For FHA, the lender needs proof of 12 months of on-time payments by the other person.¹¹ For Fannie Mae, 12 months of canceled checks or bank statements with no late payments from the person paying.¹² Run your own numbers in the calculator.

Run it with your numbersHow much house can I afford?

If you plan to buy a home soon, start keeping proof now that the other person is paying: their checks or bank statements. Our debt-to-income ratio guide explains how it is calculated and how to lower it.

What a lender cannot require of you

• It cannot force you to co-sign. The CFPB says a lender cannot force you to put your information on someone else’s loan.¹
• It cannot require a co-signer if the applicant qualifies alone. If they are told they need one, they can ask whether they would be approved without a co-signer and on what terms.²
• It cannot require that the co-signer be the spouse. Under Regulation B, a creditor cannot require the signature of a spouse or anyone else if the applicant qualifies; if another person is needed, it may ask for a co-signer but cannot require that it be the spouse.³ One exception: for a mortgage or home equity loan, a lender may ask for the spouse’s signature if state law requires it to use the property as collateral.⁴

If you feel uncomfortable or pressured to sign, the CFPB says you can walk away. And if you have a problem with a financial institution, you can submit a complaint to the CFPB.¹

Student loans and leases

Private student loans. To qualify, the student may need a co-signer.⁷ Some loans allow the co-signer to be released if the borrower makes payments for a certain length of time; the requirements are in the terms and conditions and on the lender’s or servicer’s website.⁹ If you are a grandparent: according to the CFPB, private student loan companies cannot garnish a co-signer’s Social Security, although they can sue you. Only federal loans can lead to Social Security garnishment, and most do not require a co-signer.¹⁰

Leases. A landlord may ask for a co-signer because of what a tenant screening report says. If they do so because of that report, federal law requires them to give you an adverse action notice, including your right to a free copy of the report if you request it within 60 days.¹⁴ The federal sources we reviewed do not set rules for what the co-signer of a leaseleaseA lease, or rental agreement, is the contract in which the owner or landlord gives you the right to live in and use a property for a set period of time in exchange for payment, usually rent. While the lease lasts you have possession, but the landlord still owns the property. The lease says how much you pay and when, who handles maintenance and how the agreement can end. Your rights as a tenant are usually spelled out in the lease and in your state and local laws. Before complaining to the landlord, it helps to read the lease and make sure you are also following the rules you agreed to.See the full definitionClose owes: that depends on the lease and your state’s law. Read it in full before signing. Our guide on renting without a Social Security number or credit explains other options.

Before you sign as a co-signer

1. 1. Ask whether it is really needed

   First of all

   A lender cannot require a co-signer if the applicant qualifies alone; ask whether they would be approved without you and on what terms.²

2. 2. Do the math as if the payment were yours

   Before you say yes

   Check your budget: if the other person does not pay, you will be asked to.¹

   Try it with your numbersFamily budget

3. 3. Read the notice and the contract

   Before you sign

   The “Notice to Cosigner” sums up your risk, but the contract is what binds you.⁵

4. 4. Ask for the statements

   From the first month

   Ask the lender for monthly statements or online access so you learn about a late payment in time.¹

5. 5. Check your credit report

   From time to time

   Late payments on the co-signed loan can appear on your report.⁸

6. 6. Ask for release when possible

   When the borrower qualifies

   Some loans allow the co-signer to be released; the requirements are in the loan terms.⁹

If this is you

Your son or daughter asks you to sign their car loan

If they do not pay, you will be asked to, and the lender may repossess the car and, depending on your state, sue you both.¹

You are a grandparent asked to co-sign a student loan

A private lender cannot garnish your Social Security, but it can sue you.¹⁰

You want to buy a home and co-signed before

That debt counts in your DTI unless 12 months of on-time payments by the other person are documented.¹¹

You are asked to co-sign a lease

What you owe depends on the lease and your state's law; read it in full before signing.¹⁴

Costly mistakes

• Mistake: Signing because it is “just a signature.”

  Instead: As a co-signer you can be made to pay the full amount, plus fees, without the borrower being pursued first.⁵

• Mistake: Learning about the late payment from a collection letter.

  Instead: Ask for statements or online access from the first month.¹

• Mistake: Forgetting you co-signed when you apply for your mortgage.

  Instead: Gather 12 months of proof that the other person pays on time.¹²

• Mistake: Co-signing because the lender said it “has to be the spouse.”

  Instead: A creditor cannot require that the co-signer be the spouse.³

• Mistake: Signing someone else's lease without reading it.

  Instead: What you owe depends on that lease and your state's law.¹⁴

What to do this week

1. If you were asked to co-sign, ask whether the applicant would qualify without you and on what terms.²
2. Build your budget as if the payment were yours; the family budget tool helps.¹
3. Read the “Notice to Cosigner” and the full contract before signing.⁵
4. If you already co-signed, ask for the statements or online access, and check your credit report.⁸
5. If you plan to buy a home, gather 12 months of proof of the other person’s payments.¹¹ A HUD-approved housing counselorHUD-approved housing counselorA HUD-approved housing counselor works at an agency HUD has approved to provide housing counseling: independent, expert advice customized to your situation about buying a home, renting, a missed mortgage payment, a foreclosure or credit problems. The agencies usually charge little or nothing; many serve in Spanish and offer the homebuyer education course several assistance programs require. They are not lenders or real estate agents and sell you nothing. Your county page lists the official agencies with phone numbers.See the full definitionClose can review your numbers with you, often at little or no cost.¹⁵