What is a co-borrower mortgage? Pros, cons, and comparison with co-signing
Are you struggling to qualify for a mortgage on your own? Or, are you hoping to buy a larger property but need financial help to do so?
If you answered yes, consider a co-borrower.
Co-borrowers hold equal responsibility for repaying the mortgage, but their share in the property may differ depending on the ownership agreement.
Anyone who meets your lender's requirements can become a co-borrower. But before taking out a mortgage with a spouse, domestic partner, family member, or friend, there are a couple of thing you should consider.
The role of a co-borrower in a joint mortgage agreement
If you have a co-borrower, you will both be on the property title and share ownership and responsibility for mortgage payments. Usually, up to four borrowers are allowed on a conventional mortgage.
The combination of more credit profiles and incomes can make you eligible for a higher mortgage amount and a more favorable interest rate because there is a reduced risk of default for the lender.
When co-borrowing makes sense
As per The Federal Home Loan Mortgage Corporation, the number of young adult co-borrowers has spiked since the beginning of 2021 because “home affordability is the worst it's been since 1984.”
Stagnant wages, rising interest rates, inflation, and low housing inventory make co-borrowing an attractive option while home prices remain high in a competitive market.
There are several situations when co-borrowing is beneficial:
1. You are buying a house with a partner or family member
Sharing a mortgage is mutually beneficial when joining finances with a partner, supporting a family member, such as an elderly relative, or pooling family resources to purchase a vacation property.
2. You have a less-than-ideal credit score
When individually applying for a loan, your credit score is determined by taking the median score from the three credit bureaus: Equifax®, Experian™, and TransUnion®.
For co-borrowers, the lowest median score is considered for most mortgages backed by Freddie Mac, the Federal Housing Association (FHA), and the Veterans Benefits Association (VA).
Fannie Mae, however, considers the average of all borrower's median scores. Therefore, depending on the loan source, a co-borrower with a higher credit score may increase your chances of obtaining a mortgage.
3. You need someone else’s income to qualify
If you have a low income or a high debt-to-income ratio, a co-borrower can improve your chances of getting approved for a mortgage because lenders consider the combined income of all borrowers.
The pros and cons of a co-borrower mortgage
While having a co-borrower offers many benefits, it also comes with challenges.
What is the difference between co-borrowers and co-signers?
Co-borrowers are responsible for both ownership and monthly payments, while co-signers only guarantee the loan if the primary borrower cannot make payments.
Because co-signers do not receive property ownership, this arrangement is common when a young person wants to buy a house but does not yet have a strong credit history.
In such cases, a parent may co-sign to help their child build a robust credit score and gain full ownership of a home they may not have been able to do alone.
How to choose between a co-borrower or co-signer?
Co-borrowing is ideal if you want to make a big purchase and need to increase your chances of qualifying for a larger mortgage, as well as obtain a lower interest rate.
Co-signers require no upfront payment and only cover missed payments if you cannot pay. This makes them a good option if you want sole property ownership and to build financial stability.
What steps should I take before agreeing to co-borrow or co-sign on a loan?
Have a thorough discussion with your potential co-borrower before entering a mortgage agreement. Assess the necessity of a loan and make sure you both have the same property ownership goals.
Given the potential financial risks, a written agreement is recommended to outline each person’s responsibilities and actions in worst-case scenarios.
It’s also prudent to research the laws and protections for co-borrowers in your state because there might be regulations on property ownership and credit implications.
What is the co-borrowing process like?
The application process for co-borrowed loans is generally no different than that of a single-borrower loan.
Your lender will assess your and your co-borrower income, credit scores, credit history, debt, and available funds for a down payment, just as they would with a single borrower.
As a rule of thumb, both you and your co-borrower should have credit scores of at least 620 to qualify for a conventional mortgage. The higher your scores, the more favorable your loan terms will be.
Having a co-borrower can significantly enhance your chances of securing a higher loan and better interest rates. Lenders have specific requirements for co-borrowing, so be sure to chat with yours before proceeding.
Some questions to ask your lender:
- What type of mortgage do you recommend, and why?
- What is the minimum down payment?
- What is the best interest rate you can offer?
- What steps can I take to improve the loan terms I qualify for?
Also, consider potential financial challenges or changes in a co-borrower arrangement. In such scenarios, contingency plans such as refinancing or selling the property can help prevent conflicts and ensure a seamless transition.