I am trying to get a private student loan, but my parents refuse to cosign because they fear cosigning for my student loan will affect their credit score, thus lowering their chances of getting a mortgage. This is so important because this will be my final year of college. Is this true?
Unfortunately, you and your parents are in a difficult quandary. They are correct that cosigning the loan could affect their ability to qualify for a mortgage, especially if they are planning to purchase a house in the near future.
Your Loan Will Appear on Your Cosigner's Report
If your parents cosign for your student loan, they are agreeing to take full responsibility for the debt if you can't or don't make the required loan payments. Because they share full responsibility for the debt, the loan will appear on your father's or mother's credit report—whichever one is cosigning—as well as yours.
Even if your parents are married, their credit reports remain separate, so the loan will only appear on the reports of the parent who signed the loan documents. There are a few things to consider, though, which might make them reconsider cosigning for you.
The first is that the loan almost certainly will appear on only one parent's credit reports. If both parents have strong credit histories, only one will have to be concerned about a change in their credit score. Because the mortgage lender will consider both of your parents' credit histories, the impact to their ability to qualify for a mortgage together could be minimal.
The second important issue is when your parents plan to apply for the mortgage. If they don't plan to apply during the next several months, the loan may have a minimal impact on the mortgage loan approval because the credit history will have had time to stabilize.
With mortgage lending in particular, stability is critical. It's not a good idea to take on a new debt just before or during the mortgage process. If your parents plan to apply for a mortgage in the distant future—six months to a year away, for example—cosigning may not have a substantial impact on the credit scores or the lending decision.
Talk to a Mortgage Lender Prior to Cosigning
Consider having your parents consult with a mortgage lender and ask to be prequalified. Lenders can provide guidance on what might impact their loan interest rates and approval criteria based on their current credit position. Even a minor difference in rates can make a huge difference in how much they pay over the course of the loan.
But, if they can get assurance of a good rate, and aren't planning to buy a home for several months, you can remind them that a completed education will help you land a good job.
How Can I Build My Credit So I Won't Need a Cosigner?
Your situation is just one example of why it's so important to begin establishing credit at a young age. When you are just starting out, your credit history can determine whether you are able to qualify for everything from an apartment to a cell phone to electricity service. As you can see, it can determine whether you qualify for a loan for your last year of college.
Here are some steps you can take to begin building credit history in your name:
- Open a secured credit card. A traditional credit card can be hard to qualify for when you are first starting out, but you may be able to get approved for a secured card instead. With a secured card, you give the lender a deposit in return for a credit card with a credit limit typically equal to the deposited amount. If you make all your payments on time, you could improve your credit scores and qualify for other forms of credit down the road.
- Ask to be added as an authorized user. If you have a willing family member who has good credit, being added to their credit card as an authorized user can help you start building your credit history.
- Sign up for Experian Boost®ø. If you have a cellphone, utility or streaming service account in your name, you can get credit for your on-time payments by adding that payment history to your Experian credit report with Experian Boost.
Thanks for asking.
Jennifer White, Consumer Education Specialist