Adding a co-borrower to a mortgage application can benefit home buyers in several ways. A co-borrower with strong credit has the potential to boost your chances of getting approved or qualifying for lower interest rates. Showing additional income on an application can also help lenders approve a larger loan amount.
Bringing in a co-borrower may make sense for your home purchase, but before committing to this type of arrangement, it’s crucial to make sure all borrowers understand what’s involved and how it affects the ownership of the home.
What is a co-borrower on a mortgage?
When an individual applies for a mortgage, the lender evaluates their ability to pay off the loan using their financial information. But in many cases, more than one person contributes to a home purchase. When two or more people apply for a mortgage loan together, the lenders may consider them as co-borrowers.
A co-borrower agrees to accept joint responsibility for the mortgage loan repayment. Married couples sharing home ownership often apply for a mortgage as co-borrowers. Typically, when the home purchase goes to settlement, both co-borrowers will own the house, and lenders will require both names on the title to the property.
Examples of co-borrowers include married couples, unmarried couples, or parents and children. Co-borrowing arrangements are common among home buyers, and lenders often have fairly set rules or guidelines they follow in these situations. In 2022, married couples accounted for 61% of recent home buyers, according to the National Association of Realtors (NAR), down from 66% reported by the Consumer Financial Protection Bureau in 2016. The NAR further reported that unmarried couples now make up around 10% of home buyers, the highest rate they have ever recorded.
Co-borrower requirements
Lenders consider both co-borrowers’ credit histories and income during the approval process. The double income helps borrowers qualify for a larger mortgage loan because both individuals will contribute to the loan repayment.
A co-borrowers’ good credit will also improve your chances of approval. Conversely, if a co-borrower does not have good credit, they may lower your chances of approval. In these situations, you should weigh the pros and cons of the additional income against their less-than-stellar credit history before adding them to your mortgage application.
Co-borrowers should prepare to participate fully in the mortgage approval process. Each co-borrower can expect to complete the following steps:
- Fill out an application,
- Provide required documentation,
- Consent to a credit history review,
- Sign the loan documents,
- Accept the responsibility to repay the loan per the loan documents,
- Add their name to the title of the home,
- And attend settlement.
What is the difference between a co-borrower and a co-signer?
Both co-borrowers and co-signers assume financial responsibility for paying off a mortgage loan. Generally, someone agreeing to a co-signer status is only willing to accept the responsibility of repaying a loan when the original borrower defaults. Typically, co-signers do not have any ownership interest in the home secured by the mortgage, while a co-borrower is also a co-owner.
Is it better to have a co-borrower or a co-signer?
Lenders generally treat co-borrowers as co-owners of the property. In these cases, the lender will ask to see the co-borrower’s name on the title. Married couples, long-term partners, or other groups who share an ownership interest in a home might want co-ownership advantages.
Alternatively, co-signers step in to help a buyer get approved for a loan. Generally, the co-signer does not intend to live in the home or ask for an ownership interest. When a buyer’s credit improves, the co-signer may ask them to refinance the mortgage and remove the co-signing obligation.
If you’re unsure about using a co-borrower versus a co-signer, ask your lender about the responsibilities they impose on each of these parties. Each lender may formulate its guidelines about adding a co-borrower or co-signer. They may also have slightly different underwriting policies they use to evaluate a mortgage file with more than one applicant. The type of mortgage program you choose may also have specific rules about co-borrowers versus co-signers. For example, FHA loans allow non-occupant co-borrowers on a loan, as long as one of the borrowers makes the home their primary residence.
What is a co-buyer on a house?
Like a co-borrower, the term co-buyer also refers to situations where more than one person agrees to join together to purchase a home. A co-buyer in a cash purchase would not need to borrow funds using a mortgage loan, but they may still want to have their name on the title. In some instances, lenders may use the terms co-buyer and co-borrower interchangeably.
Co-buyers may be married partners, friends, or relatives. This label may also describe a group of people buying a vacation home together who intend to split the costs of maintaining the property.
Should you use a co-borrower?
Despite the various terms lenders use to describe mortgage applicants, one thing is true: Co-borrowers, co-signers, and co-buyers all have some degree of financial responsibility for a home. The decision to buy a house with a co-borrower often means sharing both the obligation and the ownership for the property. As a buyer hoping to qualify for a new mortgage loan, listing your spouse, parent, or partner on the application can help you get approved. But remember that if the co-borrower’s name is on the property title, they own the home with you. For this reason, it’s essential to clarify all parties’ financial rights and responsibilities with both the lender and your co-borrower or co-signer.
If someone asks you to take on the role of co-borrower, it’s important to understand your responsibilities and what benefits you’ll receive, including any ownership claim to the house secured by the mortgage. Ask your lender or a real estate lawyer about the differences in co-signing versus co-borrowing before agreeing to move forward with the home purchase.
