Getting a mortgage is the first step to becoming a homeowner, but you will be beginning a long-term financial commitment. When you apply for a mortgage, you may wonder if you and your spouse should both apply as co-owners. Here is what you need to know about adding a co-borrower to your mortgage.
What is a Co-Borrower?
A co-borrower is someone whose name will be on the mortgage documents, along with yours. Their income, assets and credit history will be used to qualify for the mortgage. A co-borrower assumes financial responsibility for the loan and for making payments on time. In addition, their name will be on the title of the property, which means they have part ownership.
Most types of home loans will only allow you to add one co-borrower to your loan application, but some allow as many as three. Your co-borrower can be a spouse, parent, sibling, family member, or friend as an occupying co-borrowers or a non-occupying co-borrowers.
Usually, a spouse would be an occupying co-borrower, because they will live in the property with you. If your mom is going to be your co-borrower, she will most likely be a non-occupying co-borrower because she won’t be living in the property with you.
Is a Co-Borrower Different From a Co-Signer?
Like a co-borrower, a co-signer’s financial history and assets are considered in the loan application, and they are financially responsible for the repayment. However, a co-signer has no ownership in the house.
How Do Lenders Consider Co-Borrower’s Credit?
Lenders are required to use the lowest credit score between the two of you for the loan qualification. This means if you have a credit score that is below the minimum for qualification, you will be denied, regardless of how high your co-borrowers credit score is. So it’s important to make sure both you and the co-borrower have an acceptable credit score before applying.
Who is Responsible For What?
When you take out a home loan, both you and the co-borrower assume the responsibility of paying the loan back in full and on time. Co-borrowers assume the same credit risk as the borrower. If your payments are late, it will hurt both you and the co-borrowers credit scores.
Why Add a Co-Borrower?
Having a co-borrower may allow you to qualify for a larger loan amount since their income, assets and credit history are also factored in. Adding in a co-borrower may also improve your chances of getting approved for a mortgage by increasing your debt-to-income ratio.
However, you should make sure the co-borrower, whether it’s your spouse or relatives, will pay their financial share. If not, it’s going to cause headaches.