If you’re having trouble getting approved for a mortgage.
You may want to consider adding a co-borrower.
Most types of home loans allow you to add a one.
If you’re having trouble getting approved adding a co-borrower to the loan application may help.
In this article were going to dive into co-borrowers and co-signersand cover the differences and how they can help you.
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What is a Co-Borrower?
A co-borrower, is an additional person (usually a family member) added to a mortgage that is a guarantor the loan.
There are occupying and non-occupying co-borrowers, a non-occupant co-borrower’s credit and income are used to help the borrower qualify for a mortgage.
If you need additional income because your debt-to-income ratio is too low, a co-borrower can help you qualify for a mortgage.
Will a Co-Borrower Help if You Have Bad Credit?
If you’re trying to get approved for a mortgage with low credit scores. You may think that a co-borrower can help you get approved. Unfortunately, this is not the case.
While FHA and conventional loans allow for a non-occupying co-borrowers. Lenders will use the borrower with the lowest FICO score to determine if the loan can be approved or not.
Co-borrowers are mainly used in cases where the main borrower has a low debt to income ratio or qualified on their own but their scores are low and they need someone with a good credit rating to get a better interest rate.
If you have poor credit history a co-borrower will not benefit you, regardless of how great their credit rating is.
Co-Borrowers vs Co-Signers, What’s the Difference?
- Has no ownership in the property
- Listed on the mortgage note
- Not liable for repaying the obligation
- Required to sign loan documents
- Must be listed on the title
- Have ownership interest
- Obligated to pay the monthly payments
- Sign all loan documents
Fortunately, FHA loans have flexible credit guidelines, allowing borrowers with low credit scores to qualify. If you have a 580 or higher score, an FHA mortgage could be a viable option for you.
FHA allows up to 2 non-occupant co-borrowers. There are some requirements that need to be met:
- Have the required minimum qualifying credit score
- Live in the United States
- Must be a relative, or close friend
- Name is required to be on the mortgage and title
For more guidelines for non-occupying co-borrowers check a full list of requirements on the HUD website
A non-occupying co borrower is allowed for conventional loans as well. As with FHA, the lender will use the lesser of the borrowers credit scores to determine approval.
There are requirements a co-borrower on a conventional loan with need to meet.
- Have a minimum FICO score of 620-640
- Not required to be on the property title
- Be a relative or friend
- Live in the United States
When should I get a co-borrower?
A co-signer will only help you if your debt-to-income ratio is too low to purchase the home you want. The co-borrower will be added to the loan along with their income.
This additional income raises the debt-to-income, or DTI ratio, which will help you get approved for a more expensive home.
Should I co-sign on a loan?
When you agree to be a co-borrwer for someone so they can get a mortgage. You’re making yourself just as liable for the loan as the main borrower is.
If they miss a payment, the lender will come after you because you are equally as responsible for the loan as the main borrower.
Co-borrowers risk their credit rating
This is a big risk, your credit score is on the line. If the person you’re co-signing for misses a payment, or even worse, defaults on the loan.
You will have to pay off the balance, or the negative account will be reported on your credit report.
Being a co-signer on a loan will increase your DTI
You will have more difficulty getting a another loan, like a car loan or store credit because the mortgage will increase your DTI. Even though you don’t make the mortgage payments. As far as your credit report is concerned, you do.
Refinancing the mortgage down the road
This is a common sticking point when someone agrees to be a co-borrower. Once the main borrower is in a better financial position, you can refinance the mortgage into your name only.
If you get an FHA loan, you could qualify for a streamline refinance after 210 days. An FHA streamline refinance has no credit check and requires little documentation.
Tips to increase your credit score if it’s too low for a mortgage
If you need to increase your credit score to qualify for a loan. There are a couple of things you can do that can improve your score quickly.
Pay off your credit card balances
Pay off your credit card balances. Your credit utilization ratio makes up 30% of your credit score. Try to keep the balances less than 15% of the total credit limit to maximize your credit scores.
Get added as an authorized user
A friend or relative can add you as an authorized user to their credit card account. Since using them as a co-borrower will not help you get approved for a mortgage if your credit is bad.
This is another way they could help you. When you’re added as an authorized user, the entire account history will be reported on your credit. As long as the account is in good standing, it should raise your credit score.
If you’re a parent and thinking of cosigning for your child, there are several important things to consider.
The only time a co-borrower will help someone qualify for a home loan is if their income is not sufficient to qualify on their own.
Make sure you can handle the mortgage payment if the person you’re being co-borrowers with can’t make the payments for any reason.
If the main borrower is expecting an increase in income in the near future, refinancing the mortgage down the line is always an option.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.