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Mortgage |

4 MIN READ

When Do You Need a Co-borrower? And Why It's a Big Ask.

When Do You Need A Co-Borrower Blog Cover Image
Point Equity
When Do You Need A Co-Borrower Blog Cover Image

Have you ever considered asking a family member to help you qualify for a mortgage - as a co-signor? Much like your parents might have co-signed on your first car loan or helped you qualify for a student loan?

Unlike car and student loans - being a mortgage co-signer is a big ask.

In the world of mortgages, an individual applying jointly with a borrower is known as a co-borrower. Not every co-applicant applies for a mortgage just to help someone qualify. The majority of co-applicants are spouses or partners jointly interested in co-owning and living in a new home.

But, if you think a co-borrower is the only way you can qualify for a mortgage, there's a lot to consider. This article explains current mortgage guidelines for using a co-borrower.

And some pros and cons of being a co-borrower, so you understand exactly what you're asking.

WHY YOU MIGHT NEED A CO-BORROWER

The two most common reasons people consider using a co-borrower to help them qualify for a mortgage are low credit scores and high debt to income ratios. 

Maybe you're considering a co-borrower because of your credit score. While high enough to qualify for a mortgage, it isn't high enough to get the lowest interest rate currently available. Would having a co-borrower solve this problem?

Or, maybe you've been saving to buy a home for a long time. Finally, the downpayment is ready, but your monthly payments are too high. A large student loan payment and car loan take up most of your monthly income. With your current monthly income - you won't qualify for a mortgage payment on top of those debts.

Is a co-signer the answer to this mortgage qualifying roadblock? It might be the answer if the combination of both your monthly income is much greater than the combination of both your monthly debts. But math is only one piece of the qualifying puzzle for mortgages. 

CREDIT SCORE ISSUES

You can't solve credit score issues by using a co-borrower. Here's a quick overview of how credit scores are used to qualify borrowers so you'll understand.

When mortgage lenders pull your credit history, they receive a score from the three credit bureaus. Your official credit score for mortgage qualifying becomes the middle of the three scores - not the highest or the lowest. If two scores are the same, whether they are the highest or the lowest, they become your official credit score.

When there is more than one borrower on a loan, the lowest official credit score of all the applicants is used to qualify and determine the interest rate on the mortgage.

So if you have a credit score that is high enough to qualify for the loan but not high enough to get the best available interest rate, a co-borrower won't help. If the co-borrowers middle score is higher than yours - your score will be the one chosen because of these guidelines.

This guideline applies to spouses or partners who plan to co-occupy the property, as well. So taking time to improve your credit score is just as important as saving your down payment.

THE DEBT TO INCOME PROBLEM

Let's take a minute and talk about the math behind the debt-to-income (DTI) ratio. This is a ratio used by mortgage lenders to calculate how much of a borrower's gross monthly income (before taxes are deducted) is used to pay minimum monthly debts. The debts included in the calculation are minimum payments on revolving debt and monthly payments for installment debt.

To calculate the ratio, the total of these monthly payments is divided by the gross monthly income. If the ratio is high, the borrower will qualify for a smaller mortgage because the mortgage PITI payment is added to the monthly debt to calculate the total DTI ratio (also known as the "back end ratio.")

If your debt-to-income ratio is too high to qualify, there are strategies you can use to lower it. Use excess savings to make a larger down payment, or pay off some monthly debt with higher payments. If extra savings are available, you can take part of the down payment to pay off, or down, a debt with a higher monthly payment.

Or, you can find a co-borrower.

Even if you're purchasing with a spouse/partner, you can add another co-borrower. They must be a family member (be prepared to provide documentation confirming the relationship) to qualify. If the co-borrower occupies the property, their income and debts will be added to yours to create a blended DTI.

If they won't be living in the property but acting solely as a guarantor for the mortgage, they're referred to as a non-occupying co-borrower. There are other qualifying guidelines to be met for non-occupying co-borrowers - dependent on your down payment percentage. 

Contact a Point Equity loan officer to review the current down payment guidelines as they impact a non-occupying co-borrower. In general, the lower the down payment, the more your individual DTI impacts qualifying. For example, in some cases, with a 5% down payment, the occupying borrower(s) must have a DTI of 43% before using the co-borrower's income/debts. And if you have a 43% DTI - you don't need a co-borrower.

WHY IT'S A BIG ASK 

There's a risk involved in having a co-borrower to help you qualify for a mortgage. But the risk is all on the co-borrower. For the borrower, the benefits are clear - getting a mortgage loan and a home they would otherwise not qualify to purchase.

The risk for the co-borrower depends on you, the borrower. The mortgage lender considers everyone on the loan 100% liable for repayment. Payments are expected to be made on time - by one or all of the borrowers. The lender doesn't care how or who - only that the payments are made.

In signing all of the loan documents, co-borrowers agree to make the mortgage payments if you aren't willing or able to pay. In a perfect world, this wouldn't happen. You would refinance your mortgage as soon as you qualified to do so and permanently remove the co-borrower from your loan.

But let's look at the worst-case scenario. You miss a payment or more than one payment. Your credit history will reflect the late payments - and so will the co-borrower's credit history. And a late mortgage payment will sink a credit score as well.

And that's not the worst-case scenario yet. If you can't make the payments on the mortgage again, ever, the mortgage company will go after the co-borrower to take over the payments entirely. So on top of their housing and other financial obligations - they'll be making your mortgage payments.

You can see why getting a co-borrower to help you qualify for a mortgage is such a big ask. Even though most borrowers have no intention of not making mortgage payments - unforeseen circumstances can pop up that are out of your control. 

At Point Equity, we've helped borrowers build strategies to purchase a home, including occupying and non-occupying co-borrowers. But those aren't the only options available, as we've mentioned here. We recommend setting up an appointment with a loan officer to explore your best next step to homeownership.

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