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What Exactly Is a Co-Borrower? An Introduction
Many people, perhaps including yourself, aspire to one day become homeowners. Perhaps you’ve even saved up a sizable sum for a deposit. But, sometimes you require the assistance of another person’s income or credit history to enable you secure a mortgage on a suitable dwelling. Let’s talk about the pros and cons of mortgage co-signing.
Definition of Co-Borrower
Those who apply for a loan alongside another borrower are considered co-borrowers because they are jointly responsible for repaying the debt. In this case, both borrowers are jointly and severally liable for the loan.
Often, both parties will hold equal legal interest in the property used as collateral for the loan. The financing and the ownership of the vehicle are two distinct entities, thus this is not required. Nevertheless, if your name isn’t on the deed, you’ll be responsible for paying the mortgage but won’t have any ownership rights.
There are typically three instances in which borrowers seek out a co-borrower:
Co-purchasing a home with a significant other, member of your family, or trusted acquaintance
If you want to buy a house, you can’t do so without the help of a third party’s income.
The state of your credit is less than stellar.
I’d Like to Apply, But I Don’t Know How.
If you’re considering getting a loan with a co-borrower, you should know that you’re essentially pooling your resources with that person in order to increase your approval odds. Most of the time, people just want to be on the loan with one other, regardless of their individual financial situations. The same is true if you purchase a home with a partner and decide to get married, as the two of you will then have joint ownership of the property.
Co-signers or co-borrowers are also frequently used when one borrower has a poor credit history. We’ll go into the particulars in the following section, but know that having a co-borrower may or may not help with a poor credit score depending on the sort of mortgage you’re acquiring. Their salary can help you qualify for a loan by lowering your debt-to-income ratio (DTI).
Lenders rely heavily on DTI to determine loan eligibility. It’s a comparison between your monthly gross income and all of your monthly debt obligations, like your mortgage, vehicle loan, school loan, and credit card minimums.
DTI equals 42% ($2,100/$5,000 = 0.42) if you have a mortgage payment of $1,200 per month, a car payment of $400 per month, $300 per month in student loan payments, and minimum credit card installments of $200, $400, $300, and $600, respectively. With a DTI of no more than 43%, you’ll be eligible for the widest range of mortgages.
When two or more people co-borrow a loan, how does that process go down?
Getting a mortgage with a co-borrower is quite similar to getting a mortgage by yourself. Lenders will look at things like your income, credit history, and any assets you may have for a down payment or reserves. The only difference is that multiple candidates have applied.
One of the most important things for customers to worry about is whether or not they have a good enough credit score to get a loan.
Credit scores are averaged from the three major bureaus (Equifax®, ExperianTM, and TransUnion®) when determining individual eligibility. For most loans, including those backed by Freddie Mac, the Federal Housing Administration (FHA), and the Veterans Administration (VA), the qualifying credit score is the median of all credit scores for all borrowers on the loan.
When dealing with Fannie Mae, having a co-borrower can make things more complicated. Fannie Mae averages the borrowers’ median credit scores instead of selecting the lowest available score. An improved qualifying score might improve your chances of getting approved for a conventional loan.
Having a co-borrower with a strong income and minimal debt can greatly improve your debt-to-income ratio (DTI) and thus increase the amount of money you can borrow.
What Is the Different Between a Co-Borrower and a Co-Signer?
There is often confusion between the roles of co-borrower and co-signer. Yet, a co-signer and a co-borrower are functionally identical. No matter what you call it, you’ll both have to repay the loan. There is no single major debtor. Whether or not you appear on the title is a completely separate and independent issue that you two should settle within yourself.
Co-borrowing: The Benefits and Disadvantages
The benefits and drawbacks of co-borrowing should be carefully considered. Let’s go over them quickly.
Pros
Several lending programmes may be open to you. Having a co-borrower can increase your chances of getting approved for a conventional loan, which is often preferable to alternative options due to Fannie Mae’s practise of averaging borrowers’ credit scores.
Potentially, you can borrow more money if your credit is better. Having a co-borrower can typically reduce your DTI, which is one of the primary drivers of how much you can afford to borrow, along with your down payment.
Cons
If payments are late or skipped, it might affect the credit score of a co-borrower. You and your co-borrower should get into this arrangement only if you are both positive that you can afford your portion of the loan’s monthly payments. It’s important to know that if one borrower stops making payments because of job loss, the other borrower will still be responsible for repaying the debt.
Your commitment is long-term. While the payments are related to the co-borrowers, they will continue to be split equally in the event of a divorce or other separation. Divorce agreements typically address this issue by granting the recipient of the home an extension of time within which to secure a new mortgage.
Finally, the Bottom Line
One reason people seek for co-borrowers is to improve their chances of getting approved for a loan. With the exception of Fannie Mae, having a co-borrower on your application won’t assist much if your credit is very low. Nonetheless, reducing DTI, a significant element in preapproval amounts, can be facilitated by pooling revenues.
Bear in mind that a co-borrower is the same as a co-signer. Each borrower is equally responsible for the loan’s repayment.