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Does Co-signing an FHA Loan Hurt Your Credit?

by K.C. Hernandez

The Federal Housing Administration can allow borrowers with credit challenges to gain mortgage financing with the help of a strong co-signer. Co-signers vouch for less-than-stellar borrowers with the knowledge that they must pick up the slack if the borrower falls behind on payments. Unlike a co-borrower, co-signers have no ownership rights and usually don't occupy the home. Although you can't determine the exact degree to which a newly co-signed FHA loan diminishes your credit scores, you can count on it to initially affect your credit.

Scores Have Several Moving Parts

Co-signing an FHA loan has the same effect on your credit as co-signing for other types of mortgages, such as other government-guaranteed loans and conventional mortgages. Several variables determine the impact a new home loan has on your credit. The main factors that cause your credit to move up or down are payment history, loan balance, length of account history, newly obtained credit and the variety of credit you use, according to myFICO.

Starting Points and Point Loss

High credit scores generally sustain a higher point loss from a new mortgage. Point loss depends on a borrower's starting point; therefore, a borrower with an 800 FICO score stands to lose more points than a borrower with a 500 FICO score, according to CNN Money. Also, a new mortgage has a stronger impact on a co-signer with few and new accounts than a co-signer with several well-established accounts. A new mortgage for a co-signer with 20 years of on-time payments on 10 accounts creates only a minor blip compared to the co-signer with a 10-year payment history on only five accounts.

The Parts That Hurt

Payment history has the highest impact on your credit score. It accounts for 35 percent of how your FICO score is calculated, according to myFICO. A brand-new mortgage usually takes at least 45 days to 60 days to show up on your credit report because it takes the lender more than one month to collect your first full payment and report it to the three major credit bureaus: Equifax, Experian and TransUnion. Once reported, the payments made are few, and they make only a small dent on the total loan balance. The amount owed, which is the second most important factor affecting scores, remains high relative to the loan limit, or original balance. The negative impact of a new mortgage diminishes with time as on-time payments roll in and chip away at the balance.

The Part That Really Hurts

Co-signing hurts your credit the most when neither you nor the borrower repay the loan as agreed. Lenders report 30-, 60- and 90-day or more late payments for both borrower and co-signer, as well as derogatory events that result, such as foreclosure. The primary borrower's failure to make payments also impacts your finances if you have to make payments on his behalf. Future lenders might consider you financially overextended and may not let you borrow as much as they might have without the co-signed mortgage obligation.

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