You may be asked to help a family member or friend by co-signing for a loan or other credit-based account if you have an excellent credit score. Co-signing helps the other person open an account even if he has no credit history or has past-due bills or other issues on his credit reports. Be careful when agreeing to co-sign because your own credit can get hurt, keeping you from getting your own accounts and loans like FHA financing.
Definition
A co-signer is a person who agrees to add her name to another person's loan or credit card account and to take full responsibility for repayment of the owed amount if that person defaults on the account. The other person gets the account based on the strength of your credit. Both names go on the account, which also shows up on both of your Experian, TransUnion and Equifax credit reports. Data from the account, along with your other credit-related activities, is used to calculate your credit score. The FHA looks at that score if you apply for home financing.
Effects
You do not hurt your FHA credit as a co-signer if the other person always pays the account on time. The account has a good influence on your credit score as long as it remains in good standing. Your score drops badly if the other person stops paying because 35 percent of your credit score is calculated based on timeliness of your payments, and you are equally responsible for the co-signed account. A low score will force you to put down a higher down payment on an FHA loan, the U.S. Department of Housing and Urban Development warns, or it may totally prevent you from getting the loan.
Prevention
The best way to prevent harm to your credit score and ability to get FHA credit is to never cosign for another person's account. The only way to ward off damage if you do is to immediately pay the account yourself if the other person stops making payments. Your payments will maintain the account in good standing and keep your credit score high enough to qualify for good FHA loan terms. You cannot prevent the damage if you cannot afford to take over the payments when a co-signer defaults.
Warning
Having your credit rating ruined and losing your chance at FHA credit is not the biggest cosigning risk. You face a possible lawsuit and judgment if you have assets, according to MSN Money writer Mary Rowland, and the creditor might win its legal costs in addition to the account balance. Try to negotiate with the lender for a reduced settlement amount if you are being pursued for a defaulted account.
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