Does My Co-Signer Own My Car?

does-a-cosigner-own-the-car

Co-signing is a topic our readers ask about often. It’s not surprising, given how complicated it can get when you tie your credit to someone else. The messiness of co-signing is actually a bit ironic, considering that it often seems like a simple solution (asking someone you’re close to for help) to a big problem (not being able to get a loan).

For one of our readers, a co-signed auto loan led to some confusion. The anonymous commenter asked:

My parents put a down payment on a car for me after I got into an accident. They also co-signed for me, but I have been making the payments every month. Because they co-signed and put down a down payment, does that make it their car?

Car ownership generally goes beyond who paid for the vehicle, said John Van Alst, an attorney at the National Consumer Law Center.

“In many, if not most, states, ownership is determined by title,” Van Alst said. “You have to go back and actually look: How does titling work in your state? Is that who determines who has an ownership interest in your state?”

Who’s responsible for payments and who owns the vehicle are two different things, but the concepts often get mixed up. For example, if a couple is buying a car, they might apply for financing together, but may also want to have both of their names on the title. Not only would they both be responsible for making payments (and each of their credit scores would suffer if payments were missed), they would both have an ownership interest in the car. If the couple split up, property ownership would likely be decided in legal proceedings, Van Alst said. (However, if you live in a community property state, property acquired after a marriage, even only in one person’s name, is considered joint property.)

Financing, Not Ownership 

Generally, co-signing refers to financing, not ownership. If the primary accountholder fails to make payments on the loan or the retail installment sales contract (a type of auto financing dealers sell), the co-signer is responsible for those payments, or their credit will suffer. Even if the co-signer makes the payments, they’re still not the owner if their name isn’t on the title.

Unless our anonymous commenter’s parents’ names are on the title, it seems unlikely they would have an ownership interest in the vehicle. The reader may want to consult the paperwork and look up titling in their state.

There’s another scenario Van Alst encounters. A lot of people come to the National Consumer Law Center because they intended to co-sign financing for a vehicle but ended up becoming the owner. Not only is their name on the financing and title, the name of the person who intended to be the owner is not on either item. This happens frequently and serves as a reminder to carefully read documents before signing.

“Most creditors aren’t willing to change the ownership information on the title,” Van Alst said. “Especially if there’s any question about one of the parties’ ability to repay.”

People often turn to a co-signer when they don’t meet the income or credit requirements necessary to get auto financing on their own, but there are auto loan options for people with bad credit. Remember, you can shop around for auto financing — many credit scoring models will count all auto-financing inquiries within a specific period, usually about 14 days, as one inquiry — and it’s important to keep on eye on your credit before, during and after you apply. You can get a free credit report summary every 30 days on Credit.com.

More on Auto Loans:

Image: Sasa Dinic

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Should I Co-Sign My Brother’s Mortgage?

co-sign a mortgage

Q. My credit has always been good, and my brother’s credit stinks. He just got married and they want to buy a house. I’m thinking of co-signing the mortgage. What do I need to consider? — Brother

A. It’s very kind of you to want to help your brother, but before you do, you need to understand that you’d be taking a pretty hefty risk.

As someone with good credit, you’ll improve your brother’s chances of getting a loan at favorable rates, and you’ll likely help him improve his credit, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel, N.J.

But here are the pitfalls.

If your brother’s credit is bad, he has obviously had some credit missteps in the past, Rossi said.

“As a co-signer, you’re hoping and trusting that he has no further missteps for the next 30 years, assuming a 30-year mortgage,” Rossi said. “That’s a long time, and the only way you can get off of it is if he refinances or pays off the balance.”

As a co-signer, the mortgage will impact your credit, and as a financial planner, Rossi said he recommends people protect their credit scores at all costs.

“A degraded credit score can cost you future frustration and money,” he said. “My recommendation is to never co-sign something that you don’t have a vested interest in.”

He said the ultimate decision is always a personal one, but sometimes blood is thicker than water, so he understands why you would want to be a co-signer. Still, he cautions against it.

Co-signing a loan will make you equally responsible for the payment of the mortgage, and it will cause an immediate impact to your ability to obtain credit, Rossi said.

He said the immediate impact comes in the form of a higher debt-to-income (DTI) ratio, which is calculated by dividing your re-occurring monthly debt payment by your gross monthly income.

He offered this example: If your monthly re-occurring debt from your mortgage, student loans and car payments adds up to $1,800, and you earn $6,000 per month, your DTI is .30 or 30% (1800/6000). Add your brother’s $1,000 mortgage payment, and your DTI is now 46% (2800/6000).

“That can impact your ability to take on debt in the future,” Rossi said. “Most car loans look for a DTI of 36% or lower when considering loan applications, so expect an immediate impact if you’re planning to get a car loan in the future, and even more of an impact if you need a mortgage.”

Rossi said there are programs out there that may help your brother get a mortgage on his own. For example, there are Federal Housing Administration (FHA) loans are sold through FHA-approved lenders, which are insured by the federal government to reduce their risk of loss if a borrower defaults on their mortgage payments.

“The rates are generally a bit higher and come with some additional fees, but they’re more tolerant of borrowers with lower credit scores,” Rossi said. “Your best next step would be to have your brother speak to a mortgage broker with access to a variety of programs to see what type of loans he could secure on his own.”

[Editor’s Note: You can check your credit scores for free on Credit.com to see where you stand and how co-signing a loan might impact you.]

More on Mortgages & Homebuying:

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