Most of the consumers here at Texas Trust Home Loans buy homes with their spouse, a family member, or even a close friend. If you’re thinking about adding a co-borrower in your mortgage application, we are here to help you in determining whether it will be an excellent decision to do so.
Defining a Co-borrower
First, let’s define what a “co-borrower” is. As you might know, a co-borrower is a person who’s on the mortgage. However, home loan lenders view that term in a slightly different manner. For them, a co-borrower is a person who is an additional borrower on the mortgage with their income, assets, and credit history being used to help out in qualifying for the loan. Both co-borrowers listed on the mortgage are equally liable for loan payments and usually have joint ownership of the home (i.e., property’s title contains both names).
It is not a mandatory requirement to have a co-borrower when applying for a mortgage; however, it can be beneficial, as it might be easier for you and your co-borrower to qualify for even a bigger loan together.
Typically, spouses or partners are co-borrowers. However, someone other than your spouse or partner can be a borrower, For example, a relative or a close friend can be a co-borrower on your mortgage. If the latter is the case, then you’ll be termed as co-applicants. The process and relationship will be the same as those with the co-borrowers. Nevertheless, your finances will be accounted for separately by your lender, and your lender will issue you and your co-applicant separate mortgage applications for the same loan. You can also have a co-borrower who won’t be living in the house you’re applying loan for – such borrowers are called “non-occupant co-borrowers.”
Types of “Co-borrowers”
When does it make sense to add someone to your loan?
You can get additional benefits by adding a co-borrower, co-applicant, co-signer, or guarantor, as it can help you bring extra income and assets to the table. You can qualify for a bigger loan by combining the income of both you and your co-borrower, as you’ll be able to afford higher monthly loan payments together.
You will also have a better chance of getting approval for a mortgage with a co-borrower as it can also improve your debt-to-income (DTI) ratio. You can get your DTI ratio by dividing your monthly payments with your monthly gross income. Read more about DTI here.
Having a high DTI ratio is the number one reason for the rejection of most mortgage applications. You might be able to have a low DTI ratio when you combine your co-borrowers debt and income with yours and thus meet the lender’s criteria of borrowing. (We at Texas Trust Home Loans, offer loans to the creditworthy borrowers with DTIs up to 50%). If your co-borrower has low debt obligations and income, it can help you get a lower combined lower DTI ratio, which is also more favorable to the lenders. Below is an example:
How do lenders determine co-borrowers credit?
Conventional lenders are required to pull credit scores from all three credit bureaus for all borrowers. Once scores have been pulled, the median (middle) score is found for all borrowers, then the lower of the median scores are used for loan qualification. This means that you will not qualify for the loan if the qualifying median score is less than the minimum score required. It also means when determining the interest rates available to you, the lower of the two scores will be used. It might be best not to add a co-borrower if their credit score is too low especially when you don’t need their additional income to qualify for the mortgage.
The credit history of a co-borrower can be beneficial if there is no credit history available of the other borrower. Usually, that is the case with first-time young home buyers. The addition of comprehensive credit history can be a plus point for you when lenders are deciding to either accept or reject your loan application.
It’s a big decision to decide whether you want to have someone else included in your mortgage application. You also have to determine if a co-borrower will make your loan application stronger and whether you both are willing to face the risk of the default on loan together along with the risks generally associated with homeownership.
Remember, you can always add or remove co-borrowers from the mortgage and title in the future by refinancing your loan. If you want to explore your options and need help, we at Texas Trust Home Loans are always here for you. You can call us, and one of our loan officers will be glad to help you out.