Obtaining an affordable mortgage loan is essential to purchasing a home. When you decide to purchase a home on your own, you are solely responsible for repaying the mortgage loan and keeping up with property maintenance. A co-borrower can help to simplify the home buying process as well as take on a portion of the expenses and responsibility of owning a home. Co-borrowers can be especially helpful if you are having trouble getting approved for a mortgage on your own.
What Is A Co-Borrower?
A co-borrower is someone who will share in the responsibility of buying and owning a home. It is typically used to refer to anyone that is on the mortgage, however, lenders make a few more distinctions when it comes to that term. Lenders define a co-borrower as anyone who is listed as a borrower on the mortgage and whose income, assets, and credit history are used to qualify for the home loan. Co-borrowers are responsible for mortgage payments as well as ownership of the home. Although a co-borrower is not essential in the home buying process, it can be helpful when trying to qualify for a larger loan amount.
Often times co-borrowers are spouses or significant others, but relatives or friends can also be considered a co-borrower. If they aren’t a spouse, they will be referred to as a co-applicant rather than a co-borrower. Despite the distinction in the name – the process is actually quite similar. The lender will simply consider your separate finances and give you and your co-applicant different loan applications for the same mortgage.
There is also an option to have a co-borrower not on the loan and therefore, does not have ownership of the home. This is commonly seen with parents who co-sign for their children as they need the benefits of their assets and credit history to obtain more favorable loan agreements. In this case, the guarantor is only responsible for payment if the primary borrower defaults or can no longer make payments.
Why You Might Need a Co-Borrower
There are a number of reasons why you may need a co-borrower for a home loan including:
• Young in an Expensive City – Young people often don’t have the necessary funds or credit score for obtaining a favorable home loan. Typically, big cities come with big price tags and a lot of competition. Adding a co-borrower to the loan application can increase the odds of qualifying and procuring a home.
• Student Debt – Many first-time homebuyers have large amounts of student debt and this can dramatically affect the chances of qualifying for a home loan especially if the student loan payments are high in comparison to income level. In these cases, a co-borrower can make a huge difference in the qualification process.
• Retirees – This group usually doesn’t have a lot of disposable income and little to no cash flow which can complicate the home purchasing process significantly. A co-borrower can help a retiree downsize or purchase another home.
• Self-employed – Many self-employed people may not have traditional tax returns which can make it difficult for a lender to certify their income, an essential aspect in the home buying process.
Who Should be Your Co-Borrower?
Co-borrower situations can be precarious, so it’s very important that you choose a co-borrower that you can trust. In today’s housing market more than one income has almost become a necessity in the home buying process making co-borrowers a more common occurrence.
Typically, the safest and most common co-borrower is a family member. However, there are certain situations where non-relatives can make a great co-borrower. This typically occurs in an investment situation where a person is looking to flip a home but may not have the necessary funds or credit required to qualify alone.
In this case, securing an investor who you may not even know can be a sound decision as this is a purely business transaction that will most likely come with some stipulations to protect the buyer as well as the co-borrower.
Regardless of your personal situation, make sure that the co-borrower you do choose has a great income, low debt, and a credit score above 740. If your co-borrower lacks any of these qualities, then it may not actually result in a positive impact on your loan application.
What Should Your Co-Borrower Know?
Once you choose someone to be your co-borrower, they will naturally have questions. Be prepared for questions like “What are your future plans?”, “Do you have an exit strategy?”, “What am I responsible for?”, etc. You should take the time to think about questions like this so when your co-borrower asks, you’ll be able to answer confidently. This can be very reassuring for your co-borrower as they will be partly responsible for the property.
If you’re purchasing an investment property, then it’s essential that you decide how much equity your co-applicant will pocket. Making agreements like this beforehand can save unnecessary time and headaches down the road.
What Are the Benefits?
Co-borrowers are extremely beneficial for applicants who are unable to qualify for favorable loan terms. When there is more than one borrower on a loan it can significantly impact the principal amount approved for the loan.
There are many cases where this is useful, for example, a parent could be a co-borrower for a child who doesn’t have much credit history. The child will be able to benefit from more favorable terms such as a larger loan amount and low-interest rate.
In most cases, a partner or spouse will serve as a co-borrower which can help them get approved for a much larger loan than individually. Since the responsibility of payment is equally distributed between both parties, they are considered lower risk to lenders which will result in much more favorable terms.
A co-borrower can be very beneficial for some people, however, it’s important to consider who your co-borrower is, their responsibilities, and the state of your relationship.