MORTGAGE MATTERS

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Jul 2017

Should You Consider Adding Co-Borrower to Your Mortgage?

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WHAT YOU'LL LEARN

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definition of a co-borrower in all aspects

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who would be responsible for what

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advantages to having a co-borrower

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WHAT YOU'LL LEARN

Checkmark

definition of a co-borrower in all aspects

Checkmark

who would be responsible for what

Checkmark

advantages to having a co-borrower

You make purchases all the time: groceries, clothing, gas. However, some larger purchases, like a new car, college tuition, or a home, require you to borrow money. For any situation where you are borrowing money, your monthly debt, income, employment history, and credit history will be considered. As a borrower, you have the option to apply for a loan on your own or with a co-borrower.

What is a co-borrower?

A co-borrower is any additional borrower whose income, assets, and credit history are used to qualify for the loan and whose name appears on the loan documents. For example, your spouse could be the co-borrower on your car loan, or your mom could be a co-borrower on your home loan. Along with the borrower, a co-borrower assumes financial responsibility for the full loan amount and for making payments on time. Additionally, their name usually goes on the title, which means they have part ownership in the property. Most types of home loans will only allow you to add one co-borrower to your loan application, but some allow as many as three. Your co-borrower can be a spouse, parent, sibling, family member, or friend as an occupying co-borrowers or a non-occupying co-borrowers. Usually, a spouse would be an occupying co-borrower, because they will live in the property with you. If your dad is going to be your co-borrower, he will most likely be a non-occupying co-borrower because he won’t be living in the property with you.

However, a co-borrower is different from a co-signer.

Like a co-borrower, a co-signer financial history and assets are considered in the loan application, and they’re financially responsible for the repayment of the loan. However, unlike a co-borrower, the co-signer’s name usually does not appear on the title of the property. This means the co-signer has no ownership in the property itself, just a financial responsibility for the loan amount.

Who is responsible for what?

When you take out a home loan, you, as the borrower, assume the responsibility of paying the loan back in full and on time. Your monthly mortgage payment will include principle, interest, taxes, and insurance. Taking out a loan and making payments affects your credit. If you make late payments or miss payments, your credit will be negatively effected, and vice versa.

A co-borrower is basically a co-owner and the borrower’s equal in the mortgage loan process. The co-borrower is just as responsible as the borrower is for repaying the full loan amount on time.

A co-borrower assumes the same credit risk as the borrower.

If the mortgage payments aren’t made on time, it will hurt the credit scores of both borrowers. If they’re made correctly, it will benefit both scores.

Why add a co-borrower?

Having a co-borrower has many advantages. For one, it can allow you, as the borrower, to qualify for a larger loan amount since both the borrower and the co-borrower’s income, assets, and credit histories are factored in. In some situations, like with spouses, a co-borrower will help make payments on the loan and pay for costs associated with the property, like a kitchen update or water heater replacement.

Adding a co-borrower to your loan application can also help if you lack a credit history. With no credit or a low score, a lender may be hesitant to lend to you. You may be more likely to be approved by having a co-borrower (or co-signer — but remember, they’re different), who acts a a guarantor for your loan. If you can’t make your payment, the co-borrower is responsible for making it. In this way, a co-borrower adds a layer of protection for the bank from you defaulting on a payment.

Co-borrowing is common with couples, many of whom want to pool their finances and credit worthiness to qualify for a bigger loan. However, having both spouses on the mortgage loan is not a requirement. You would only add your spouse if they bring something more to the table with respect to income and assets. Likewise, you wouldn’t want your dad to be your co-borrower if he had a much lower credit score than you and didn’t strengthen your mortgage application in other categories, like with his debt to income ratio. Buying a home is a big decision and investment. If you don’t qualify for a loan on your own, or if you want to combine financial histories to qualify for more, adding a co-borrower to your loan application could be a good option for you.

Frequently Asked Questions

Chances are, if you're wondering about it, someone else has too. Here are answers to some of the questions we hear most often.

What is a co-borrower on a mortgage?
A co-borrower is an additional person whose income, assets, and credit history are used to qualify for the mortgage loan and whose name appears on the loan documents. Unlike a co-signer, a co-borrower’s name typically also appears on the title of the property, meaning they share ownership. A co-borrower is equally responsible with the primary borrower for repaying the full loan amount on time. Their credit is affected by the payment history of the loan in the same way the primary borrower’s credit is.
What is the difference between a co-borrower and a co-signer?
Both a co-borrower and a co-signer have their financial history considered during the loan application process and are financially responsible for repaying the loan. The key difference is ownership. A co-borrower’s name typically appears on the title of the property, giving them partial ownership. A co-signer’s name does not usually appear on the title, meaning they carry the financial responsibility of the loan without holding any ownership interest in the property.
Who can be a co-borrower on a mortgage?
A co-borrower can be a spouse, parent, sibling, other family member, or in some cases a friend. Most home loan programs allow one co-borrower, though some programs allow up to three. Co-borrowers can be occupying, meaning they’ll live in the property, or non-occupying, meaning they won’t live there. A spouse who shares the home is a common example of an occupying co-borrower. A parent helping a child qualify for a loan without living in the home is a common example of a non-occupying co-borrower.
Does adding a co-borrower help you qualify for a larger mortgage?
Yes, in many cases. Because both the borrower’s and co-borrower’s income, assets, and credit histories are factored into the loan application, adding a co-borrower with strong financials can help the borrower qualify for a larger loan amount than they might qualify for on their own. However, if the co-borrower has a significantly lower credit score or a high debt-to-income ratio, adding them may not strengthen the application.
Does a co-borrower need to live in the home?
No. Co-borrowers can be either occupying or non-occupying. An occupying co-borrower lives in the property with the primary borrower. A non-occupying co-borrower doesn’t live in the property but is still financially responsible for the loan and typically appears on the title. Loan program guidelines may have specific requirements around occupying versus non-occupying co-borrowers, so your Mortgage Banker can clarify regarding your specific loan type.
Does a co-borrower’s credit score affect the mortgage application?
Yes. A co-borrower’s credit history is reviewed as part of the loan application, and lenders typically use the lower of the two borrowers’ qualifying credit scores to determine loan eligibility and interest rate. If the co-borrower has a strong credit score, it may help the application. If the co-borrower has a significantly lower credit score than the primary borrower, adding them could result in less favorable loan terms.
If I add a co-borrower, are they equally responsible for the mortgage payments?
Yes. A co-borrower assumes equal financial responsibility for the full loan amount and for making payments on time. If payments are missed or made late, both the borrower’s and co-borrower’s credit scores will be negatively affected. If payments are made correctly and on time, both credit scores benefit. Unlike a co-signer who steps in only if the primary borrower cannot pay, a co-borrower is considered an equal party in the loan from the beginning.
Can a co-borrower be removed from a mortgage?
In most cases, removing a co-borrower from a mortgage requires refinancing the loan into the primary borrower’s name alone. This means the primary borrower would need to qualify for the loan independently based on their own income, assets, and credit at the time of refinancing. Some USDA loan refinance programs allow co-borrowers to be added or removed without a full refinance. If you’re considering removing a co-borrower, speak with your Mortgage Banker about the refinancing options available for your loan type and current financial situation.