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Having a co-borrower on your mortgage can make sense if it helps increase your chances of getting approved for a loan. If you’re considering adding a co-borrower to your application, here’s everything you should know.
What is a co-borrower on a mortgage?
A co-borrower, also referred to as a co-applicant, is an additional borrower on a mortgage. In a co-borrowing situation, both borrowers complete an application, and the mortgage lender considers both your qualifications and those of the co-borrower, including assets, credit history and income. Typically, the borrower with the better credit profile determines the terms of the loan.
Importantly, both you and the co-borrower can have ownership of the property — in other words, both your names are on the title — and are responsible for repaying the mortgage.
A co-borrower isn’t the same as a co-signer. A co-signer doesn’t have their name on the property title, but is responsible for repaying the loan. Generally, a co-signer can be beneficial if a borrower needs help from someone with good credit to get approved for a mortgage. If the borrower fails to pay, the lender has the right to pursue payment from the co-signer.
A borrower might ask his parent to be a co-signer on a mortgage, for example, since the parent’s credit history and added income and assets can increase their chances of securing a competitive mortgage rate.
Who can co-borrow a mortgage?
The following types of people can be co-borrowers or co-applicants on a mortgage:
- Domestic partners
In general, any adult that’s willing to assume legal responsibility for repaying a mortgage and wants ownership in the property can be a co-borrower.
Each potential co-borrower presents different requirements and liabilities, depending on the type of co-borrower arrangement you choose. For example, a co-borrower (or co-applicant, if you are not married to the other borrower), will both be listed on the title of the home and responsible for paying the mortgage. However, guarantors only have to pay the mortgage if the primary borrower fails to pay.
The types of co-borrower relationships are:
|Type of co-borrower||Relationship||Financial disclosures?||Listed on title?||Responsible for paying the mortgage?|
|Guarantor||Friend/relative||Yes||No||Only if primary borrower can’t pay|
|Title holder||Spouse/partner, friend/relative||Yes||Yes||No|
Does it matter who’s the borrower and who’s the co-borrower?
Since the borrower and co-borrower are equally responsible for the mortgage payments and both may have claim to the property, the simple answer is that it likely doesn’t matter. In most cases, a co-borrower is simply someone who appears on the loan documents in addition to the borrower.
Some lenders, however, may indicate a “primary borrower.” The criteria for determining who this person is differs between lenders. Some may define the primary borrower as the person with the higher income, for instance, or as the person who appears first on the application.
When is a co-borrower a good idea?
Co-borrowing a mortgage is best when both parties want their name on the property and agree to share the responsibility of paying back the loan. It’s typical for partners or spouses who reside in the same property to be co-borrowers.
Having a co-borrower with good credit can also be a good idea if it boosts your chances of being approved for a mortgage (and at the best possible rate), especially if your credit score is on the fairer side.
It’s also a good idea if the co-borrower’s financial situation means that you can add additional assets and income to your application. A higher income could mean qualifying for a larger mortgage since it indicates to lenders you can make a higher monthly payment.
Make sure you consider the unique financial situation of you and your co-borrower when making this decision.
Times when it makes sense to add a co-borrower:
- When you and the co-borrower have an equal partnership in the property and both benefit from the loan
- When your co-borrower has strong finances and credit score
- When a co-borrower has a lower debt-to-income ratio than you
Can a co-borrower come off a mortgage?
The short answer is yes.
However, while it’s possible to remove a co-borrower from your mortgage — such as if that person is deceased or the loan is completely paid off — the process can be somewhat challenging. That’s because lenders are reluctant to remove borrowers since doing so can increase their risk, and cuts into their ability to collect payments from both parties.
Still, you can remove a co-borrower from a mortgage. It may require paying fees (some quite significant) and take some time, but here are a few methods:
- Speak to your lender. The first logical step is to see what your lender can do. Lenders that are willing to remove co-borrowers may require the remaining borrower to re-qualify for the loan by themselves. That means you’ll need to have enough income to make the monthly payments and a good credit profile. The co-borrower may also be required to sign a document, such as a release of liability.
- Refinance your mortgage. Refinancing your existing mortgage might be a possible solution if your current lender won’t release your co-borrower. Again, you’ll need to have good credit and sufficient income and equity to qualify.
- Transfer your mortgage. If your mortgage is an assumable loan, you should be able to release a co-borrower and transfer your mortgage to someone else (ideally, you). Your lender will need to review your credit, and there may be fees to pay.
- Sell your home. If you’re not attached to the property (say you inherited it), selling it and using the proceeds to pay off the mortgage might be an option to release all borrowers from the debt.
Alternatives to a mortgage co-borrower
Borrowers who have poorer credit but don’t want to add a co-borrower to their mortgage could consider the following:
- Establish or reestablish credit. Working on improving your credit can up your chances of getting approved for a loan, or getting approved for a loan with a more favorable interest rate. Building credit takes time, so be patient. One of the easiest strategies to improve your standing is to make on-time payments on any existing balances, or to open a secured credit card and do the same.
- Pay down debt. Paying down your debt decreases your debt-to-income (DTI) ratio, showing lenders that you have the means to take on a mortgage by yourself without stretching your finances too thin.
- Consider an FHA loan or VA loan. Both the FHA and VA loan programs have less strict credit and down payment requirements, which can help you qualify for a loan independently.