Should I Add a Co-Borrower to my Mortgage Application?
Getting approved for a mortgage loan is the first step toward the milestone of becoming a homeowner. It is also the beginning of a serious, long-term financial commitment. For many first-time homebuyers, getting approved on your individual finances or as a co-borrower is a difficult decision.
According to data analysis released by Zillow, 70% of prospective home-buyers frequently search for a home with their spouse or partner.
But when you are actually applying for the mortgage, should you & your spouse both apply as co-borrowers? Or, should you try qualifying for the mortgage on your own?
Education continues to be a distinguishing factor in the first-time homebuyer decision making process, so let's start there.
It's important to understand the differences between a Co-signer and a Co-borrower.
Co-Borrower: this is someone whose name is on loan documents along with yours. Both people are equally responsible to repay the loan in this situation. Taking both the primary and co-borrower's income, assets and creditworthiness into consideration for the loan application may help qualify for a mortgage loan with better rates.
The co-borrower has what is called an “ownership interest” in the home or condominium you are looking to purchase. Co-borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co-borrower's income, assets, liabilities, and credit history are considered in determining creditworthiness.
Co-Signer: a person whose assets, income and creditworthiness are taken into consideration to help qualify you for a mortgage. Co-signers are liable to repay the loan, but they have no ownership interest in the house.
Obviously, having someone with a substantial credit history (ex. a parent, grand-parent, uncle, aunt) co-sign on the home loan can help you get a mortgage with the best interest rates. The benefit for the co-signer (aside from helping you buy your house) is that the regular monthly payments made by the homeowner reflects well on his/her credit report.
Co-signers are liable for repaying the mortgage obligation and must sign all documents with the exception of the security instruments. The co-signers income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the co-signer must complete and sign the loan application.
As you can see, the downside of co-signing a mortgage loan is the risk of default. If you (homeowner / occupier) cannot afford to make monthly payments, your co-signer is liable to repay the loan. This is an extremely important point for all parties to understand upfront.
There is a third, but less known option — the “non-occupant co-borrower.”
A non-occupant co-borrower is a person who is co-borrowing on a home, but not living in it. Non-occupant co-borrowers are a step above co-signers — they're “partners” in the home's ownership. This person may be added to a mortgage loan to help you qualify for a mortgage. A non-occupying co-borrower is beneficial from an income or credit perspective.
Some lenders who allow non-occupant co-borrowers, such as Fannie Mae (HomeReady) and Freddie Mac and some conventional home lenders, require a non-occupant borrower to be a relative of the person who will be residing in the home. FHA loan programs allow non-occupant co-borrowers for home buyers who have little or no income for income qualification.
As a non-occupant co-borrower, you get the same notices as the borrower so you know if they're not paying on time.
When you apply for your mortgage, tell your mortgage broker that you'll be using a non-occupant co-borrower on the loan. Your mortgage broker will know what to do.
Fact vs. Fiction
First-time home buyers may assume that if they are married, applying for a mortgage as co-borrowers is a requirement.
Applying for a mortgage as Co-Borrowers is not a requirement.
Another commonly held belief is that, by bringing a Co-borrower onto your loan application, you will always improve your chances of being approved.
However, it is crucial to understand that the secondary mortgage market entities, Fannie Mae, Freddie Mac, Ginnie Mae, that buy loans from lenders will generally require lenders to use the lower scoring borrower’s credit score (specifically, the median score from Experian, Equifax, or TransUnion credit reports) to underwrite the loan.
Even if your co-borrower has excellent credit, if you have poor credit, it's very possible that your co-borrower's credit score won’t help you in determining the application's creditworthiness.
What's the Right Move?
Ultimately, adding a co-borrower to your mortgage loan application will result in having your income history, assets, liabilities, and credit assessed for eligibility and creditworthiness. The interest rate you both are quoted and your overall eligibility will be influenced by each other's personal financial history, so it's always a good idea to strengthen your credit as much as possible before applying.
Since you will both have equal responsibility to repay the loan, if you choose to bring on a co-borrower or co-signer, make sure you understand the legal differences. Additionally, given that many co-borrowers are related or spouses, you should discuss what will transpire if things go south (e.g. divorce, sudden death, job transfer, etc.)
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