Authorized Users and Co-Signing for a Mortgage

Should You Co-Sign for Someone?  How will it Affect Your Ability to Qualify for a Mortgage?

In this interview with Sam Parker from MyCreditGuy.com, we go in depth on a discussion about authorized users, co-signing and being a co-borrower in the context of qualifying for a home loan.

• Introduction to the Expert
• Authorized User Strategy
• Dangers of being an Authorized User
• Authorized User Scams
• Can an Authorized User Hurt Your Credit?

I’ve provided the transcript to your conversation below.  Unfortunately, transcriptions do not always translate into discernible english.

Our conversation ended up going into a couple of different directions that are not necessarily related, but relevant all the same.

The first part of our conversation is about Authorized users.  Should you become an authorized user in order to increase your credit scores?  We also discuss authorized user scams that could get you into a lot of trouble.

The second part fo this conversation is around being a co-signer on someone else’s account or mortgage.  This topic will also help you to understand the benefits and threats that could become someone that you’re asking to be a co-signer on your mortgage.

As always, there typically isn’t a a right or wrong answer, or approach to these solutions.  It always comes down to whether or not it’s a good decision for you.

That said, watching the video will give you a much more fluid understanding of the topic and conversation.  Have questions?  Ask below!

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Introduction to the Expert

Scott: Alright, welcome back to the findmywayhome.com educational video series. This is awesome, I’m gonna call it something different every single time I do one of these and we’ll just keep people guessing.

If this is your first time visiting findmywayhome, we are a consumer education website. We help consumers learn about buying homes, real estate, mortgages, everything that has to do around that, and most importantly, our goal here is to give you, as the consumer, access to professionals and experts in the industry.  

There are so many people out there that do not work for consumer’s best interest. Over the past 10 years, we’ve had over a million people visit our website and I’ve answered thousands and thousands of questions from consumers, and I tell you what almost every single time, it’s because they got bad information, misinformation, or they were straight up lied to.

So that is why we are here. Specifically why we are here is because I would like to introduce you to a good friend of mine, Sam Parker, who is the founder, owner, proprietor, co-founder, co-proprietor, with his lovely wife, of My Credit Guy.

They are a credit restoration company that specializes in working with lenders to help consumers get into a situation, either to get the best interest rates or to qualify for a loan, and Sam is just a wealth of knowledge, and just one of the most ethical and professional business people that I know. So Sam, thank you very much for joining me today.

Sam:  Absolutely.  Thanks so much for having me Scott, how are you doing?

Authorized User Strategy

Scott:  I’m good, I’m good, so I’ve got an interesting topic to discuss with you because there’s been a lot of changes around this, around this lately,  and there is definitely a lot of misinformation–cosigners and cosigning, on other people’s credit. Back in the day, this used to be treated differently, right?

Didn’t you used to, it was a common practice, many, many years ago, to just get at as a cosigner on somebody’s credit report to boost your credit score up?  Does that still work?

Sam: It actually does. Authorized user is I think what you’re referring to, and authorized user does still work. Now there’s been a lot of efforts by honestly not only the banking industry, but also the credit bureaus to say, authorized users aren’t going to work the same anymore or we’re gonna change things, or whatever, they do still work like that.

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Call somebody or you call a credit card company up and say I want to add Joe Schmoe to my credit card, his Social Security number is this, his date of birth of this. They will read you off a little thing that says, hey you understand that you had to tell this person that you’re adding them and that it can hurt them or help them on the report of their credit. Is that all true?

And then, if you attest to that, then they will still add it and that person will still.

Scott:  Now why does that does help you if you’re an authorized user on somebody else’s credit card?

Sam:  So let’s say that you didn’t have any credit cards or your scores were low and I have a $15,000 card that’s been open up for the last 10 years, and good utilization, everything on it, and I add you as an authorized user and your social and date of birth are attached.

That thing is gonna get inserted into your credit report like you had a credit report for the last 10 years with $15,000, even though it will say authorized user in terms of score benefit, there is not a differentiation. So you’re now all of a sudden getting credit for a bunch of payments that you never make.

Scott: Wow, okay, I had a scenario like this where the gentleman had canceled his last credit line.  It was like seven months ago, and they were working with another lender, and they had some challenges, they sent me a credit report from like November of last year.

When I pulled his credit, he had no credit score. He stopped using his credit, canceled everything, went dark for seven years and nine months and had zero credit score.

We ended up doing is adding him as an authorized user on one of his wife’s credits credit cards, and within about three weeks I had a 690 credit score, and he only had a credit line and then he had a bunch of old stuff on there.  

Now is there any risk for me to go on as an authorized user on somebody else’s account?

Dangers of being an Authorized User

Sam: So yes, but not long-term if you know the way that the system works, meaning if I add you on. Let’s talk about that same card. I added you on, it was great. I made all my payments for the last 10 years, now let’s say, I had bad times.

Next month, I maxed out the card and I stop making my payments on it, you now have late pays on your credit report, you now have a maxed out credit card, and that’s gonna drop your scores significantly.

Now the one thing that you can kind of have in your back pocket is that legally at anytime, you as the authorized user, should be able to call up that card company and say get me off there, this is not my debt, I don’t want it there.  

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And that’s why the powers that you have worked to removed the authorized user from scoring algorithm in the past because it really does kind of create an area where there can be some shady stuff going on where you get the best of it, but then you have none of the consequences of it.

But, I kind of look at it like this, there is enough areas where the consumer gets absolutely owes, that it’s not so bad that maybe there’s more in little things still left that the consumer can lean on, but we, as a company, don’t really push authorized users.

We’ll usually have the client establish their own positive trade lines, so that it’s a long-term benefit, it’s a long-term behavior change, if you have a 590 credit score, and you’ve earned it, by doing bad things with your credit, and I bail you out by putting you on as an authorized user, now you’re qualifying maybe for a home or for money that you shouldn’t have because your behavior doesn’t actually warrant, you’re getting that.

So you are more likely to go derogatory or to let that account go to derogatory status. So, in some cases like the one with your client, the wife and the husband, well, they’re already sharing those bills anyway, so the husband should get credit for the wife’s.

Authorized User Scams

Sam: But there are companies out there, there’s even shady loan officers that will add their clients to their credit cards as authorized users.

There’s companies out there and I get the emails everyday, and I’m disgusted by them, but it will literally will be a list of credit cards and how much it would cost.

If I wanted to refer a client to add onto that credit card, and the commission that I will receive if I get it.

I of course delete those, but a lot of credit repair companies don’t, unfortunately, they actually refer their clients to pay $1000 to be added onto an AMEX card that’s been opened for the last 6 years with a 30% balance to limit ratio. 

Scott:  Yeah, that just seems really man, that’s kind of hairy.

Sam: Yeah, no that’s super fraudulent and hairy, and you know, how dare you say that there are sleazy loan officers out there. I’ve never heard of a loan officer or a mortgage company do itself that sleazy. That’s ridiculous. I don’t think it’s super common out there, but it does happen unfortunately.

Scott:  I would say it’s probably more common than you would think because, and here’s the problem with this is consumers don’t know that it’s illegal.

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Their loan officer, and this is the challenge, this is the unique situation that I’m in at findmywayhome, is I get to hear the horror stories after people have been misled, and told one thing.

They find me with a problem, and a lot of times they are being told these things, when you call the lender, especially if you see a TV commercial, you pick up the phone, you talk to somebody, there is an assumption that this person is a professional and that they’re giving you a professional advice.

That is not always the case. That just isn’t always the case. And so that’s difficult. So as a consumer, if your loan officer, or if somebody is offering to add you as an authorized user, I would run like hell because that is a very slippery slope to just being an unethical business.  

We have talked in another video, when we were talking about quick tips for maximizing credit scores, and one of the things that we talked about is never, one of things to never do is to cancel a credit card. If you are an authorized user, and then you remove yourself as an authorized user, is that gonna have the same impact on your credit as if you cancel the credit card?

Yeah, it will be like—if you were getting a positive benefit from it, it will like that credit card never happened, and you will see your scores dropped because of it.

So I mean, I’m not standing up here on my pole and saying that how dare you do this, and as a consumer, I wouldn’t rush out to remove yourself from authorized user if it’s helping you. I just would not fall into the trap of paying to be added or necessarily being added if you don’t have any part in paying that bill.

But if it’s on there, and it’s helping you, I also cannot, in my right mind, tell somebody to do something that’s gonna drop their scores. But what I would do is start to build up your own positive trade lines.

We’re down the road, if anything goes wrong with that authorized user account, you can pop yourself off and all of this, you’re gonna come to a crash and hope because your scores were propped up solely on that authorized user.

And the reality is that you shouldn’t be an authorized user on somebody’s card who doesn’t want you to be an authorized user.

You shouldn’t be doing it to manipulate the system anyhow, because that’s just gonna end up coming back and biting you up.

Can an Authorized User Hurt Your Credit?

If I have somebody like say my parents or something and they do add me as an authorized user to help me out, is there anyway that could hurt them?

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No, as long as they don’t give you a card because I mean, you are an authorized user now. So like for instance I added one of my business partners as an authorized user, and this is in a different business, because we sell properties together, and we make the joint payments to our contractors, on these cards, but it’s all coming out on my bank account and everything.

But it’s shared profits, so I wanted him to credit for what we’re doing, at the same time, and no offense buddy, if you’re watching, I’m not gonna let him have a credit card either because if he went out and use it rack it up or something like that, then I’m gonna be responsible for that.

Now, I’m still gonna have the opportunity to make all those payments, so it’s not like he’s gonna have the ability to make me miss a payment but if you sign somebody on as an authorized user, they are an authorized user.

They can use the card if you let it get them in their hands. So like when I did, and sorry buddy, but what I did was I put him on as an authorized user, I had that card set to my address, and that card would be shredded as soon as it arrives, so he isn’t getting the benefit because even if our joint proceeds are going towards paying that credit card off at the same time, all purchases have to through me.  

So, I wish it wasn’t like that, but what it is, and he’s excellent for the business that he does.

Co-Signer Concerns

Scott: So okay, so that’s authorized user. Let’s talk a little bit about cosigners because it’s not an easy role for somebody that cosigns on a student loan or an auto loan or even a mortgage that’s pretty common as well. What do I need to know about being a cosigner on somebody’s account?

Sam: Yeah, what you need to know is that you are 100% responsible for that debt. You are not just doing somebody a favor, and that’s usually how it’s proposed to us, is that you get that brother or that friend that comes out, it’s like—but really what they’re saying is, I hadn’t put myself in a position actually to make this purchase, and now I want you to help me with it, do me a favor, come on, don’t you love me, that sort of thing.

And so, we do it thinking that we’re just helping and really what we’re doing is we’re putting ourselves 100% on the line to make that payment and there’s a couple of different reasons, people need to understand that this hurt you, so first of all, if you are a co-signer, and you sign on, you are 100% liable, meaning if that brother that said that he would make all the payments, doesn’t make the payments, you can’t call the bank and just say, well I just cosigned.

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I’m just helping him, you signed on it as someone who would reach, make sure that they’ve got their money every single month, so if you don’t pay it, you will get late pays on your credit report, you will have charges, you can get a repossession, you can get a foreclosure, you can get sued, you can get garnished, I mean, keep going, whatever you think that you were setting yourself up for, you are.

Not to mention, that it was all well and good that you just helped your brother or your friend get qualified for something but now comes time where your wife or your husband says, you know what, a new kid is on the way, family is getting bigger, let’s get a house.

So you go to buy your house, but remember six months ago, you cosigned for somebody else’s, and that is gonna be factored into your, not only credit score in the way it works, but your debt to income ratio and possibly now, you don’t qualify for your own loan because you help somebody else get theirs.

So, not only is it putting you on the line and in harm’s way, in every sense of the matter, but you could be disqualifying yourself because now you signed up for more debt than you can even afford, even if you were just cosigned.

So there had been recent changes to Fannie Mae, conventional guidelines and they are now looking at contingent liabilities differently than what they used to in the past. So what they are doing now is, if you can produce 12-months worth of canceled checks from the responsible party, if it’s not you, then you can eliminate that debt from your debt to income ratio, whether it’s a mortgage or whether it’s like a credit card or something like that.

But what you said that’s really, really important, first of all, it has to be a full 12 months, you have to be able to have documentation showing that you paid 100% of it. It can’t be, well they paid it cash this one month. That’s not gonna fly, you are not going to be able to eliminate that debt, and you run the risk, like you said, as a cosigner, you are Plan B.

So if they miss a payment, and you don’t know that they miss a payment, you’re not going to know until you get a phone call from the creditor saying that the payment wasn’t made right, because you’re second on the list for people they’re gonna bother if the payment doesn’t show up.

So you’re not necessarily going to know about that, and yeah, that’s that, you know those are tough things to get around.

You know scenarios where I think a cosigner situation is good, as if I think if you are buying a house, and let’s say you only have 12-month history on a second job. So you make plenty of money to qualify for the home, but we just can’t use your income for the second job, and then you’ve got your parents or your brother, sister willing to help you out.

You want to refinance that thing in 12 months. Once you can use that income, get them off the loan, so that they’re no longer at risk. Those are probably some of the things that you should look out for, but also some of the lending guidelines have changed recently regarding student loan, a lot of parents were cosigned for student loans and the kids usually make the payments but if it is deferment, there’s nothing you can do.

Nobody’s making payments, so you’re getting hit with that thing.  If you’re a homeowner and a parent, Fannie Mae has changed their guidelines that you can now pay off those student loans and it’s not considered a cash out refinance.

So it’s the least expensive you can get, lowest interest rate you can get, you follow no cash out, pricing guidelines, you still have kind of your loan to value restrictions for cash out, but other than that.

So I mean cosigning isn’t a bad thing, but it’s something you don’t want to just do it without having an exit strategy, and without understanding all aspects of what it is you’re committing to because you’re on the line.

Well right and most importantly, just consider the person that you’re cosigning for, and you don’t have to say this to their face.  You could just say, I’m not gonna do it, but I mean if it’s your brother-in-law, that never holds down a job and wastes money constantly, you see that.

You just need to know it’s more than doing somebody a favor that you are truly on the hook for them, now if it’s your responsible child or your best friend.

I mean listen if you’re in the backseat of the car and that car drives to a 7-11, pulls out a couple of gun and holds them up, you’re still responsible because you’re in the backseat of that car, you are there at the scene of the crime. So it’s a very, very valuable tool but is also has a lot of nuances, and it can impact you.

So understanding that I think is really, really important, and as always, Sam, I appreciate your input on this and your feedback, is or anything else you think we should know about being a cosigner or cosigning?

Sam: Yeah, I guess it wouldn’t be a true cosigner situation but it’s in the same family, signing on with a spouse or a boyfriend, girlfriend even and then breaking up or getting a divorce.

The one thing that clients and consumers need to understand is that a divorce decree does not supersede a pre-existing contract.

The bank is not gonna care at all about your relationship status on Facebook, if you guys both sign for a mortgage, or a car, or anything and the other person goes late, even if the divorce court says, this person is responsible but you haven’t refinanced out of your name, you will get late pays on your credit report, all of the gamut of things I listed off before.

So just remember, divorce court does not supersede appraises in contract. If you sign on the line with somebody especially in a joint situation, it does not matter what your relationship status is, you are absolutely 100% liable.

So that’s kind of in the same family out of cosigning issue, but it’s one that really bites people a lot of time. So if you’re about to, unfortunately, get a divorce, before you all get teary, make sure that he or she who is responsible for the debt, refinance out of your name, before or as soon as possible, so that you don’t actually have that liability floating around out there anymore.

Scott: That’s good. That’s really, really important and you know what I mean? Along those lines, don’t be so eager to try to help out your boyfriend or girlfriend because trust me, it’s not your first boyfriend or girlfriend, it won’t be your last, and stuff happens, right?

At least if you’re married to the person, there’s a little bit more kind of holding in there. But it can be very helpful if you’re using it right, if you understand it, you’re making informed decisions, it’s a powerful tool, but it is also a huge liability, and I think understanding it is the key to being successful, if you need that strategy.

So as always, Sam, you are awesome. I appreciate it. I appreciate your expertise and professionalism. I appreciate you being here to share your knowledge with everybody. So thank you so much and we’ll see you next time.

Sam: Anytime, thanks Scott.

Scott: You got it, bye.

Working with a Mortgage Expert

Choosing the best mortgage based on your qualifications requires that you work with a professional loan officer that has experience with all of the options that are available to you.

All mortgage companies are NOT created equal.  Big box lenders that advertise on TV, radio and the internet, often only target a very narrow qualifying criteria.

These popular lenders spend millions of dollars on marketing and advertising, only to dump you into a call center and put you in the hands of an inexperienced customer service telemarketer.

Big box lenders try to convince unsuspecting consumers that it’s the lender that matters, and never mention the fact that your loan officer is the gateway to you getting the best mortgage.

You should avoid these types of lenders at all costs if possible.  They do not offer lower rates or better service, but they do have more money to convince you that they do.

Set Yourself Up for Success

Not sure where to find a professional loan officer that you can trust?  You’re in the right place!

If you have any questions or comments about this topic, feel free to leave a comment below, or you can shoot me an email at questions@findmywayhome.com.

Now sure how to identify a professional loan officer?  Watch these expert interviews I’ve done with professional loan officer friends of mine.

I firmly believe that once you hear how a professional loan officer communicates, it will help you to avoid silly mistakes and errors that are common with inexperienced or uneducated loan officers.