Co-Borrowers on a Mortgage: Everything You Need to Know
Are you thinking about buying a new property, but are worried about qualifying for a mortgage on your own?
Well, have you considered getting a co-borrower?
A co-borrower on a mortgage is a person who applies for a mortgage loan together with the primary borrower.
The co-borrower’s income, assets, and credit score are looked at along with the primary borrower’s to determine if the loan can get approved.
Co-borrowers are commonly used when one borrower’s income is not sufficient to qualify for the loan on their own or when the borrower’s credit history is not strong enough to secure a loan with favorable terms.
By adding a co-borrower to the application, the lender can consider the combined income and credit history of both borrowers, which may increase the likelihood of approval or result in more favorable loan terms.
Both borrowers are equally responsible for paying back the loan and are both listed on the mortgage documents.
If one borrower fails to make payments, the other is still liable for the full amount of the loan. It’s important for co-borrowers to understand their responsibilities and to have a clear agreement in place regarding payment obligations and expectations.
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- VA Loan with a Co-Borrower
How to add a co-borrower to the mortgage
A co-borrower simply needs to complete a loan application. If you already have a loan in process, let your mortgage loan officer know that you want a co-borrower added.
If you are just now applying, complete the loan application together.
When a co-borrower is added to the loan application, the lender will consider the combined income, assets, and credit scores of all borrowers.
The application process for a co-borrower loan can be more complicated than a regular loan application, as both borrowers’ financial information will need to be assessed.
While a majority of the loan programs allow for a co-borrower, the VA loan has some restrictions.
Co-Borrower on a VA Loan
According to the guidelines set by the U.S. Department of Veterans Affairs (VA), a co-borrower on a VA loan must be a spouse or another veteran who intends to live in the property.
This means that a non-spouse, non-veteran co-borrower is not allowed on a VA loan. Some lenders may allow it with a program called a “joint VA loan”, but there will likely be a down payment required.
The VA loan program is designed to help veterans and their families become homeowners, and the co-borrower requirement ensures that the loan is used for its intended purpose.
Know Your DTI (Debt-to-Income Ratio)
Debt-to-income (DTI) ratio is a financial metric that compares your monthly debt payments to your monthly income. It’s used by lenders to assess your ability to repay a home loan.
The mortgage application process
The application process for a co-borrower loan is similar to that of a regular loan application.
Here are the general steps involved in the application process:
Pre-Approval: It’s a good idea to get pre-approved for a loan. This will help you determine how much you can afford to borrow and what loan terms you qualify for. The pre-approval starts with completing a loan application.
Gather Information: You and your co-borrower will need to provide personal and financial information, such as income, employment history, credit history, and debt obligations.
Submit Application: Once you’ve gathered all the necessary information, you can submit your loan application. This can typically be done online.
Underwriting: After you’ve submitted your application, the lender will review your information and verify your creditworthiness. This process is known as preliminary underwriting, and it involves assessing your credit score, income, and other financial factors to determine your eligibility for the loan.
Loan Approval: If you and your co-borrower meet the lender’s requirements, you’ll receive a loan approval.
Loan Closing: Once you’ve been approved for the loan, you and your co-borrower will need to sign the loan documents and agree to the loan terms. This process is known as loan closing, and it typically involves paying any closing costs associated with the loan.
Pros and Cons of Having a Co-Borrower
Having a co-borrower on a loan can have both advantages and disadvantages. Here are some of the pros and cons of having a co-borrower:
Increased borrowing power: A co-borrower can increase the total income and creditworthiness of the borrowers, which can help them qualify for a larger loan amount.
Better loan terms: With a co-borrower, lenders may offer better interest rates and loan terms, as the combined income and credit score of both borrowers may make the loan less risky for the lender.
Shared responsibility: With a co-borrower, both parties share responsibility for the loan. This can make it easier to make payments, as each borrower is responsible for a portion of the loan.
Shared responsibility: While shared responsibility can be an advantage, it can also be a disadvantage if one borrower defaults on the loan. In this case, the other borrower(s) will still be responsible for repaying the loan in full, and if there is a default, credit scores will be affected for both borrowers.
Relationship strain: Co-borrowing with a friend or family member can put a strain on the relationship, particularly if one borrower is unable to make payments or defaults on the loan.
Credit risk: If one borrower has a poor credit score or financial history, this can negatively impact the credit score and financial standing of the other borrower(s).
Limited control: With a co-borrower, each borrower has equal say in the loan and how it is used. This can limit the control that one borrower has over the loan.
Overall, co-borrowing can be a good option for some borrowers, but it’s important to carefully consider the pros and cons before entering into a co-borrowing agreement.
Removing a co-borrower from a mortgage
There are several ways that a co-borrower can be removed from a mortgage, including:
Refinancing the mortgage: The main borrower may be able to refinance the mortgage in their name only, removing the co-borrower from the loan. However, the main borrower will need to meet the lender’s qualification requirements on their own, which can be challenging if their credit score or income isn’t high enough.
Selling the property: If the property is sold, the mortgage will be paid off, and the co-borrower will be released from the loan.
Loan assumption: Some mortgages may allow the main borrower to assume the loan in their name only, removing the co-borrower from the loan. However, this can also be challenging as the lender will still need to approve the main borrower’s creditworthiness and financial stability.
Difference Between a Co-Borrower and a Co-Signer
A co-borrower is someone who applies for a loan alongside the primary borrower and shares responsibility for repaying the loan.
Both borrowers have equal responsibility for repaying the loan, and both are listed on the loan documents. This means that both borrowers have ownership in the property being financed and are responsible for making payments on the loan.
On the other hand, a co-signer is someone who signs the loan agreement along with the borrower but does not share ownership in the property being financed.
The co-signer agrees to take responsibility for the loan if the borrower is unable to make payments.
The co-signer’s credit score and financial history may be used to help the borrower qualify for the loan, but they do not have an ownership interest in the property.
In short, a co-borrower is a joint borrower on a loan who shares ownership and responsibility for the loan, while a co-signer is someone who agrees to take responsibility for the loan if the primary borrower is unable to repay it.
Are Co-Signers allowed on a mortgage?
No, co-signers are not common for mortgage loans. All borrowers on the loan have an ownership interest in the property.
Is a non-owner occupant the same as a co-signer?
No, a non-owner occupant is not the same as a co-signer.
A non-owner occupant is someone who is not the primary borrower and does not live in the property being financed, but has a financial interest in the property.
This could include someone who is co-borrowing on the loan or an investor who is providing funds for the purchase of the property.
A co-signer, on the other hand, is someone who signs the loan agreement along with the borrower but does not have a financial interest in the property.
The co-signer agrees to take responsibility for the loan if the borrower is unable to make payments.
While both non-owner occupants and co-signers can help a borrower qualify for a loan, they have different roles and responsibilities.
A non-owner occupant typically has a financial interest in the property and is responsible for making payments on the loan, while a co-signer is only responsible for making payments if the primary borrower is unable to do so.
There are alternative options to getting a co-borrower.
Here are a few:
Improve credit score: A borrower can work on improving their credit score by paying bills on time, paying down debt, and disputing any errors on their credit report. This can help them qualify for a loan on their own without the need for a co-borrower.
Increase income: A borrower can increase their income by getting a higher paying job, working more hours, or starting a side business. This can increase their borrowing power and help them qualify for a loan on their own.
Save for a larger down payment: A larger down payment can help a borrower qualify for a loan without the need for a co-borrower. A larger down payment can also help the borrower get better loan terms and lower interest rates.
Explore alternative lending options: There are alternative lending options available, such as peer-to-peer lending or online lenders, that may be more flexible than traditional lenders and may not require a co-borrower.
Buy a less expensive property: By purchasing a less expensive property, you may be able to secure a mortgage on your own without needing a co-borrower.
In summary, there are several alternative options to getting a co-borrower, and it’s important to explore all options before entering into a co-borrowing agreement.