When to use a mortgage co-borrower

What is a co–borrower mortgage?

A co–borrower mortgage is one where the loan agreement is signed by two – or occasionally more – people who aren’t spouses or romantic partners. In other words, they are simply friends (or perhaps relations or even strangers) who think they could successfully share a home but wish to be homeowners rather than renters.

There are big advantages to buying with a co–borrower. But this strategy comes with risks, too.

Considering buying with a co–borrower? Here’s what you should know.

Check your mortgage options. Start here (Dec 22nd, 2021)

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Co–borrowers are becoming more popular

Co–borrower mortgages have seen an explosion in popularity over the last seven years.

Indeed, The Wall Street Journal reported on Oct. 12, 2021 that numbers had increased nearly eightfold over that period. WSJ states:

“Since 2014, when millennials became the largest share of home buyers in the U.S., the number of home and condo sales across the country by co–buyers has soared. The number of co–buyers with different last names increased by 771% between 2014 and 2021, according to data from real estate analytics firm Attom Data Solution.“

Note that there are two kinds of co–borrowers.

• An occupant co-borrower lives in the home with you and is jointly responsible for mortgage payments. You share in the responsibilities and benefits of homeownership
• A non-occupant co-borrower (also called a ‘co–signer’) does not live in the home with you or make regular mortgage payments. But they act as a guarantor on your loan and must make payments if you fail to do so

This article primarily discusses the first type of co–borrower: one who is helping you to purchase the home, and will also live there as their primary residence.

Benefits of co–borrowing on your mortgage

The most common reason why prospective homeowners choose a co–borrower mortgage is that it allows them to get onto the housing ladder earlier than if they were to go it alone.

Depending on where you want to live, that can be a big deal. Because home prices are soaring nationwide and buying has become less affordable for many.

Indeed, prices were up by 18% between 2020 and 2021 according to the Federal Housing Finance Agency’s home price index.

Chasing higher prices can be tough on your own. But with a co–borrower? Homeownership might be within easier reach.

Five best reasons to team up with a co–borrower

Teaming up with a co–borrower can bring several advantages that can accelerate both borrowers’ access to the benefits of homeownership:

1. You could buy a home sooner

As we just discussed, this is often the main, underlying reason for buying a home with a co–borrower.

By adding your co–borrower’s income to your own, you’ll improve your mortgage application and seriously boost your home buying budget. (Just keep in mind that their debts and credit will impact your eligibility, too, which isn’t always a good thing. More information below.)

2. Bigger down payment = better home or mortgage deal

Pooling your and your co–borrower’s savings can give you a much bigger down payment. And that will mean you can either afford a better home or get a better deal on your mortgage.

If you can put down 20% or more of the purchase price with your combined savings, that will mean that your “loan–to–value” (LTV) ratio is 80%. And an LTV of 80% or less means you never have to pay for mortgage insurance, something many new borrowers find a real burden.

Meanwhile, the higher your down payment, the lower the mortgage rate you’re likely to be offered.

Don’t forget to check out all the down payment assistance programs operating in the state, city, or county where you’re planning to buy. If you’re eligible, those can top up your savings and bridge the gap between those and your down payment (and often closing costs) needs.

Verify your home buying eligibility. Start here (Dec 22nd, 2021)

3. You’re spreading your debts across two borrowers

For lenders, the level of your existing debts is a very important factor in determining how much to lend you. They call this your debt–to–income (DTI) ratio.

Lenders prefer borrowers to have DTIs of 43% or less, though it’s possible to get a mortgage with one as high as 50%.

A 43% DTI would mean that all your inescapable monthly debt payments (minimum card payments, student, auto, and personal loans, your new mortgage, etc.) add up to 43% of your pre–tax monthly income.

When you have a co–borrower, both your incomes and debts are taken into account. So your joint DTI may be lower than your (or your co–borrower’s) alone.

And that’s good. Because it likely means you’ll be able to borrow more and be offered a lower mortgage rate than otherwise.

But the flip side is that if your co–borrower has a lot of existing debt, their DTI can actually hinder your purchasing power. So keep this in mind when deciding whether to co–borrow.

4. You could buy a bigger, better home

Of course, you don’t need a 20% down payment. Many put down only 3% or 3.5% using a conforming loan (from Fannie Mae or Freddie Mac) or an FHA loan respectively.

And some don’t need a down payment at all. That could be you if you’re buying in an area designated as rural by the U.S. Department of Agriculture (with a USDA loan) or if you’re eligible for a VA loan through the Department of Veterans Affairs. Almost always, VA loans are available only to veterans or current service members.

But, no matter how big your down payment, you can typically get a bigger and better home with a co–borrower. That’s because your lender will take both your incomes into account when calculating how much you can borrow. So you might be able to afford the sort of dream home that would have been impossible on your own.

5. Or buy a more modest home that lets you maintain a great lifestyle

But you don’t have to borrow the full amount that a lender says you can. Some prefer to live in a less expensive home, which means that they’ll pay less each month for their mortgage.

True, you probably won’t add to your net worth quite as much as if you were to max out your borrowing. Because home prices typically rise as a percentage of the value of the property. But you and your co–borrower would have more disposable income at the end of each month. And you might prefer that.

Check your mortgage options. Start here (Dec 22nd, 2021)

Drawbacks of using a co–borrower mortgage

Those are the main pros of having a co–borrower on your mortgage. But what about the cons?

There are a few:

1. You won’t qualify with bad credit

If your credit score is in seriously bad shape, you probably won’t qualify for a mortgage. And you often can’t piggyback on your co–borrower’s higher score.

Chase explains how lenders typically calculate the applicable credit score for a mortgage application:

“Lenders determine what’s called the ‘lower middle score’ and usually look at each applicant’s middle score. For example, say your credit scores from the three credit bureaus are 723, 716, and 699, and your partner’s are 688, 657, and 649. Lenders will then use the lower of the two middle scores, which is 657.”

2. It can be a lopsided arrangement

Ideally, you want to co–borrow with someone who has a similar credit score, DTI, and down payment savings to yours.

You can help each other out if your financial strengths and weaknesses complement one another. But if one of you has sound and impressive finances while the other’s are the opposite, that could create issues further on down the line.

However, there may be ways around this. If one of you has higher savings, a better salary, and sounder finances, you could reach an understanding (get it in writing in an attorney–drafted, legally enforceable agreement before committing) over your different “Interests” (ownership shares) in the home.

So, for example, if you’re paying 70% of the down payment and are making 70% of the monthly payments on the mortgage, you might agree that you receive 70% of the proceeds when the home’s sold.

3. You need an exit strategy

One of you may soon find a romantic partner and wish to move in with them. Or one of you may get a new job that’s too far away from home to commute. Or perhaps one or both of you will simply tire of the co–living arrangement.

There could be several reasons why your co–borrowing arrangement stops being mutually beneficial. And you need to anticipate those and agree before you borrow on what happens if one arises.

Does one party move out and find a renter to pay their share of the mortgage and bills? Or do you have to sell the home, perhaps disadvantaging the one who’d like to stay?

Neither party can force a sale unilaterally. But one can get a court order if you’re at an impasse and he or she has a persuasive case.

4. You’re jointly and severally liable for the loan

This is the most important point about mortgage co–borrowing.

Whatever private arrangements you make with your co–borrower, your lender will be interested in only one thing: That you make your monthly payments on time. And you’re each “jointly and severally” liable for those.

That means that if one of you becomes sick or unemployed or otherwise can’t pay their share, the other assumes liability for continuing to make the full mortgage payments as they fall due.

Of course, the risks here are no higher than if you were married and had a joint mortgage with your spouse. But it means you need to be nearly as careful and picky when you’re choosing a co–borrower as when you’re selecting a wife or husband.

Co–borrowers on a mortgage: FAQ

Explore your mortgage options

Whether or not you buy with a co–borrower is just one part of the home buying equation.

You need to decide which type of loan you’ll use, how much you’ll put down, and what your long–term homeownership plans look like.

When you’re ready to get started, connect with a mortgage lender who can walk you through all your options and set you on the path to becoming a homeowner.

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