When do I need a co-borrower?

buying a home, co-borrower
Photo: pacresmortgage.com.

The journey to homeownership isn’t always easy, and sometimes you need a little help. If your DTI ratio is too high, or maybe your down payment is too small, you may need a co-borrower to help you get a home.

Let’s break down the responsibilities of a co-borrower and who you should consider adding to the process.

What is a Co-Borrower?

A co-borrower is a person who, along with you, accepts responsibility for repaying a loan. This borrower will also be listed on the mortgage, and their assets, income, and credit history will be evaluated in the application process. Both borrowers will have ownership of the house because both names will be on the title.

Although it’s not a requirement to have a co-borrower, you may find it easier to qualify for a home loan with both of your financial history taken into consideration. In most cases, the co-borrower will be your spouse or partner, but there are instances where a friend or family member can apply for a mortgage with you.

Co-Applicant vs. Co-Borrowers

For non-married couples, your co-borrower is considered a co-applicant. The home buying process for a co-applicant is almost exactly the same as a co-borrower. However, your lender will track the separation of your finances by issuing an individual loan application to each of you for the same mortgage.

A co-applicant will still be equally responsible for the mortgage, just as a co-borrower would be.

Guarantors

In the case of a guarantor, one of the borrowers is not on the title, and therefore does not have any ownership of the house. The guarantor will only act as a co-signer and will not be required to make any monthly payments.

However, a guarantor would be responsible for the loan if the primary borrower was unable to pay for the loan. For example, a parent might co-sign for a child to help get them approved for a home loan. If the child could not pay back the loan, the parent would then be responsible for the loan.

Benefits of a Co-Borrower

Did you know that the #1 reason mortgage applications nationwide get rejected is because of a high DTI? This is especially the case for millennials and first-time homebuyers.

DTI, or your Debt-to-Income Ratio, is your monthly debt payments divided by your gross monthly income. This number is just one way your lender will measure your ability to manage the payments you make every month to repay the money you have borrowed.

When you have another borrower on the loan application, you have the potential to improve your DTI. The combined income between the two of you may allow you to qualify for a larger loan amount. On the other hand, if your co-borrower has low income or a bad credit score, they may hinder your chance of getting the loan.

Potential Risks as the Non-Primary Borrower

So, someone has asked to add you to their mortgage. Even if you’re just a co-signer, with no regular, monthly payments, you still face financial risks:

Your own DTI will increase. Later on, down the road, you may need to apply for a large loan yourself. Your lender will take all financial ties into consideration, including the mortgage you’re currently a co-signer for. Even though you’re not making payments, the loan could end up as your responsibility if the primary borrower can’t handle the loan.

Late payments from the primary borrower show up on your credit report. A pattern of late payments will lower your credit score. However, the lower the credit score, the higher the interest rate could potentially be.

Do you need a co-borrower? Contact a Mortgage Advisor today to learn more about your home loan options.