Debt Ratio

What will happen to your debt ratio if someone asks you to cosign for a loan?  Your debt ratio will worsen as far as lenders see it.

• Your credit report now shows additional balance and monthly payment
• Your back debt-to-income ratio increases and thus new amount you can borrow lessens

Debt Ratio: Learn from mistakes of others

Steve decided to refinance his mortgage. He was sure the deal would be easy. His income increased, no new credit card debt, no new cars. When broker called, Steve was in for a mild shock.

His credit report showed two lines of credit he forgot. One was the Ford credit store installment loan. It has a balance of $14,700 and monthly payment of $350. That wasn't bad at all, Steve was grossing $6,000 a month and his total expenses including housing costs were under $2,200. His back ratio was 36%, just fine. Oops, I cosigned for Jack he recalled. But why it is on my credit?

The other loan presented a bit of a challenge. It was a student loan for daughter of friend Steve had known since childhood. The problem was the loan was deferred till 8 months later. The credit report showed a total amount of $12,000 under balance column and $12,000 x 1 under terms.

It meant pretty much that unless Steve had all documentation showing the terms of repayment like loan amortization, interest rate, minimum payment, etc, any perspective lender would count the $12,000 as a single monthly payment. The back debt ratio would go thru 200%. Never mind Steve had over $40,000 in the bank. Since he couldn't find papers, he had three options:

• to pay off the $12,000 loan balance
• to get documentation that shows the terms and deferment
• to forget about refinancing and miss the lowest rate ever seen

Luckily, bank that funded that loan, promptly sent Steve a copy. He proved his debt ratio was still 36%, refinanced and swore to himself that if ever cosigns he'd keep all the papers.

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