Homebuyers use a co-borrower mortgage when they need more than one income to qualify for a mortgage. Co-borrowers can be a couple, but they don’t have to be. The co-borrower doesn’t even have to live in the house.
Understanding how a co-borrower mortgage works can help you decide if such an arrangement would make it easier for you to qualify for a home loan.
What is a co-borrower on a mortgage?
A co-borrower on a mortgage is someone who applies for the loan with you, is listed on the deed to the home, and shares responsibility for paying the mortgage. If you miss a payment, the co-borrower is obligated to cover the payment. If you default on the mortgage, the co-borrower must pay it.
Having a co-borrower may make it easier to qualify for a mortgage because the lender considers both applicants’ income and credit scores for loan approval. The lender sees the mortgage as less risky with a second person sharing responsibility for the loan.
In many cases, couples buy a house together, with one listed on the mortgage application as the borrower and the other as the co-borrower. However, anyone willing to take on the responsibility could be a mortgage co-borrower. For instance, a parent might help their adult child buy a house by being a co-borrower. Someone planning to buy and flip a house might find an investor who is willing to be a co-borrower in return for a portion of the profits.
Types of co-borrowers
Lenders recognize two types of co-borrowers:
- An occupant co-borrower lives in the home. Examples of an occupant co-borrower include a spouse or partner.
- A non-occupant co-borrower does not live in the home. For example, a parent or investor might be a non-occupant co-borrower.
Whether they live in the home or not, co-borrowers are obligated to pay the mortgage and sign all the paperwork at closing. The co-borrower’s name is on the title to the house, and they own an interest in it. Because you two own the home together, you will have to determine how to split the ownership or buy the other person out if you dissolve the relationship.
Co-borrower vs. co-signer: What’s the difference?
Co-signers and co-borrowers are similar, because both allow you to include someone else’s income when you apply for a loan. And both a co-signer and a co-borrower are responsible for paying the mortgage if you don’t pay it.
The difference between a co-borrower and a co-signer comes down to ownership interest. The co-borrower’s name is on the title, and they have a claim to the property. A co-signer’s name doesn’t get put on the title, and they have no claim to the property.
When does a mortgage co-borrower make sense?
Adding a mortgage co-borrower may help when your income isn’t high enough to buy the home you want. When you have a co-borrower, the lender will consider both your incomes to determine what size loan you qualify for. A co-borrower may also help if your credit isn’t great or if you have a lot of debt.
If you have a high debt load, the co-borrower can help improve your debt-to-income ratio, or DTI. The mortgage lender calculates DTI by adding up all your monthly debt payments and dividing the total by your gross monthly income.
Generally, lenders prefer a DTI ratio of 36% or lower, including the mortgage payment. If your debts exceed that ratio, the extra income from a co-borrower may help you qualify for a loan, as long as your co-borrower isn’t paying off a lot of debt, too.
Situations where a co-borrower makes sense include:
- First-time homebuyers who need their parents as co-borrowers to qualify for a mortgage.
- Couples who want to buy a home together and pool their income to qualify for a larger mortgage.
- House flippers who are willing to split the profit with an investor.
- Self-employed buyers with irregular income.
How to apply for a co-borrower mortgage
The process of applying for a mortgage with a co-borrower is the same as when you apply by yourself. Both applicants fill out the loan application, which requires information such as your name, Social Security number, employment data, and information about income, assets, debts, and any owned real estate assets. There are no specific co-borrower requirements.
Once you’ve applied, the loan goes to underwriting, where the lender will confirm the information to ensure you are a good credit risk. The underwriter examines the home’s loan-to-value ratio, your credit record and score, DTI ratio, available cash reserves, and the property’s appraised value.
Your co-borrower’s credit score should be as good as yours (or better). Your co-borrower’s credit score is important because some lenders only consider the credit score from the borrower with the lower score. For conventional loans backed by Fannie Mae, the lender will use credit scores from both borrowers, looking at the lower score for each if two scores are available and the middle score for each if three scores are available.
Pros and cons of using a co-borrower on a mortgage
Using a co-borrower can help you get a loan when you might have trouble qualifying without help. However, when you have a co-borrower, you’re a joint owner. Before adding another person to your mortgage, discuss issues such as who pays how much, what each borrower’s share of the equity is, and what you will do if one of you wants to sell the home.
- Allows you to qualify for a larger mortgage.
- Allows you to qualify with a higher debt load.
- Can make you a lower risk to a lender.
- Share ownership of property.
- Must refinance to remove co-borrower from the title.
- Must get the co-borrower to agree when you want to sell the home.
Co-borrower mortgage FAQs
What rights does a co-borrower have on a house?
A co-borrower’s name is on the title to the house, so he or she has a claim on the house. The co-borrower is also responsible for paying the mortgage if the primary borrower doesn’t pay.
Does it matter who is the primary borrower vs. co-borrower?
If one person is on the mortgage solely to help the other person qualify for the loan, the helper should be the co-borrower. However, if a couple is buying the home together, it doesn’t matter who is listed as the primary borrower.
Does a co-borrower need to be on title?
A co-borrower’s name goes on the title, which gives the co-borrower an ownership claim to the property. On the other hand, a co-signer’s name isn’t put on the title, meaning the co-signer has the responsibility of paying for the loan without any claim to the house.
Trying to decide if you need a co-borrower to qualify for a mortgage? Talk to a local Finance of America Mortgage Advisor today to learn more about your options.