With home prices skyrocketing over the past few years, more first-time buyers are enlisting the help of more seasoned homeowners - namely their parents or grandparents - to be co-borrowers with them. In fact, since 2020, the percentage of young adult buyers purchasing a home as co-borrower has increased almost 40% as newbies look for ways to break into the housing market.
If you are trying to become a homeowner, but the down payment, climbing prices, and jumping mortgage rates are proving to be a stumbling block, co-borrowing may be a good fit for you as well. Here’s how it works:
Co-Borrowing Defined
To co-borrow on a mortgage simply means to apply with another borrower on a loan. You equally share the responsibility for the mortgage repayment and in most cases you both own the title on the home.
Why Co-Borrow?
Unless you are co-borrowing with your live-in partner, the most common reason for adding someone else to your mortgage application is to increase your chances of being approved. If you have less-than-perfect credit or if you can’t come up with a full down payment on your own, asking a parent or other generous person with strong financials to join you on your home loan can help you jump over these hurdles.
What is Required to Qualify?
The loan application process is very similar to applying as an individual. Lenders will look at your credit scores and histories, incomes, assets, and debt-to-income ratios. The credit score is the trickiest part as in many cases, including on loans guaranteed by Freddie Mac, the FHA, and the VA, lenders take the lowest median credit score of all co-borrowers. That means your co-borrower’s higher credit score likely won’t be able to help you out if yours is really low. The exception is Fannie Mae loans which take the average of the median of both borrowers’ credit scores.
Is There a Difference Between Co-Borrowing and Co-Signing?
You may have heard of people co-signing on a loan. This is basically another name for co-borrowing. The two parties can decide if both will have claim to the title or not, but they will still both be fully responsible for covering the mortgage.
If your co-borrower has a good income and low debt, their more impressive DTI can definitely improve your chances of being approved.
The Risks and Rewards
While adding a loved one to your mortgage application can be great for qualification purposes, there are risks involved. For example, your co-borrower is a permanent part of your mortgage until the loan ends. So even if you get to the point where you are financially stable enough to handle the entire mortgage on your own, your co-borrower still legally shares the responsibility with you and perhaps a claim on the title. The only way to get them off is to refinance the mortgage into just your name. This typically requires closing costs and some paperwork, but the bigger issue is if your co-borrower will agree to the end of their share of the house and if they will require you to buy them out. These details should always be decided before the original loan is made.
If you miss your mortgage payment or default on the loan - it will affect the credit score of your co-borrower. That could obviously create financial difficulty for them as well as hard feelings between the two of you.
In today’s tough buying climate, asking a loved one to co-borrow on your mortgage can be a smart way to finally become a homeowner. You both also receive the rewards of equity growth and tax savings. Co-borrower is great way to buy a home if you can't afford it on your own. Just be clear on what is expected of each of you and get it in writing!
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These materials are not from HUD or FHA and were not approved by HUD or a government agency.