Maureen from San Diego wrote in asking for help regarding a challenging situation—a family member needs a favor, but one that can potentially hurt her credit score.
Her brother lost his job about a year ago and has subsequently fallen behind on his mortgage payments. On top of that, the value of the property has dropped by about 35% since the home was purchased, and is now worth far less than what is currently owed. Despite attempts to find a work-around, the situation has reached a point where foreclosure is imminent.
Maureen’s brother has started the process of searching for new housing, but is concerned about his chances of being approved for a rental as he was surprised to learn that many landlords pull a credit bureau report and score as part of the applicant review process. His credit score is already very low, as his missed payments on his mortgage and other credit accounts over the past year are already reflected in his credit report.
Maureen’s brother has asked if she would be the primary on the rental application given she has good credit (credit scores above 720) and has a better chance of being approved—while he would actually make the rental payments. Maureen wants to help, but has concerns doing this could have a negative impact on her credit rating.
Unfortunately, this situation is becoming more commonplace as the number of people in duress with their mortgage continues to remain at record levels. As family members, it’s natural to want to help and provide the best support you can, and yet it is equally important to think carefully about potential short- and long-term ramifications these actions could have on your own financial profile.
The impact on Maureen’s credit report/score if she were to sign a rental lease would likely be minimal. There may be a small number of points lost due to the credit inquiry that is posted on her file when the landlord pulls her credit report. Right now, it is relatively uncommon that the payment history (positive or negative) for rent to be reported to the three national credit reporting agencies. However, the rental entity could opt to turn over a severely delinquent renter to a collection agency, and that could end up being reported and would be considered negative by the credit score.
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If your name is on the lease, it would be posted to your credit bureau report. In addition, there are other smaller credit reporting agencies that may be capturing such information and a lender may access it when reviewing your application for credit.
It is important to note that the person signing the rental contract is legally liable for making the payments, regardless of any informal agreement one may have with a family member regarding who will actually be paying the rent (this holds true for roommates, as well). That could have ramifications if you’re seeking new credit in the future. For example, completing an application for credit usually requires you disclose all of your monthly debt obligations and your signature on that application indicates you have truthfully disclosed that information. One could argue that disclosure of the monthly rental amount should be included if you are legally responsible for the lease.
The mixing of family and financial matters can be a recipe for angst and frustration. When surfaced, it is a best practice to carefully review and understand potential ramifications before making any decisions that could have unintended consequences.
[Resource: Get your free Credit Report Card]
Image: Anthony Easton, via Flickr.com