Everything You Need to Know About Adding a Co-Borrower to Your Home Loan

Buying a home is one of the most exciting financial milestones in life. But for many people, affording a home on a single income is tough, if not impossible. Adding a co-borrower to your mortgage application can help make homeownership more achievable.

A co-borrower is someone who applies and qualifies for a mortgage loan with you. Both co-borrowers’ incomes and credit profiles are used to determine eligibility. Co-borrowers share responsibility for making the monthly payments, and typically share ownership of the home.

Below we will explore when and why you may need a co-borrower, how the process works, the pros and cons, and alternatives if co-borrowing isn’t feasible for you.

When Do You Need a Co-Borrower?

There are a few common scenarios where having a co-borrower can be helpful

• You don’t meet income requirements on your own – Lenders want to see you have enough steady income to comfortably handle the mortgage payment A co-borrower’s income can help you qualify for the loan amount you need

• Your debt-to-income ratio is too high – Lenders look at your total monthly debt payments compared to income A co-borrower can help improve this ratio

• Your credit score needs a boost – Some lenders average co-borrowers’ credit scores. A co-borrower with good credit can offset challenges on your credit reports.

• You want to buy with a partner – Unmarried couples or family members purchasing together need to apply as co-borrowers to share ownership.

• You don’t want to apply alone – Even if you qualify by yourself, you may prefer to have a co-borrower for added security in case your situation changes.

How Does the Co-Borrower Process Work?

When you apply for a mortgage with a co-borrower, the lender gathers information and evaluates eligibility for both people. Here is an overview of what to expect:

• Credit reports and scores – Lenders check credit reports and scores for all co-borrowers. Many lenders average the scores.

• Income and employment – Lenders verify employment status and income for each applicant through pay stubs, W-2s, tax returns and bank statements.

• Assets and reserves – Details on savings, investment accounts, retirement funds, and gifts used for the down payment are collected.

• Debt obligations – All debts like credit cards, auto loans, student loans, and existing mortgages are factored in.

• Property appraisal – The home is appraised to ensure its value supports the loan amount. Both borrowers’ names may appear on the appraisal.

• Loan approval – After underwriting, the lender issues a mortgage approval listing proposed terms both co-borrowers must accept.

• Closing – At closing, co-borrowers sign the mortgage documents and become jointly obligated on the loan.

Having organized financial records and good communication with your co-borrower makes the process smoother.

Pros and Cons of Co-Borrowing

Adding a co-borrower has advantages but also some potential drawbacks:

Pros

• Increase your buying power and loan options
• Offset challenges if your credit or income alone doesn’t qualify
• Share ownership with a partner you trust
• Lower mortgage rate by improving debt-to-income ratio
• Reduce risk if your income declines in the future

Cons

• Both co-borrowers obligated on total mortgage balance
• Missed payments hurt both co-borrowers’ credit scores
• Co-borrower strategy doesn’t work with all loans or lenders
• Shared home ownership can get complicated if relationship changes
• Refinancing or selling requires participation of all co-borrowers

Weigh the pros and cons carefully when deciding if co-borrowing matches your homebuying plans and financial circumstances.

Co-Borrower vs Co-Signer: What’s the Difference?

Some confuse co-borrowers and co-signers, but they are distinct roles with different implications:

• Co-borrowers appear on title and share ownership. All co-borrowers must sign off on selling the home or refinancing the mortgage.

• Co-signers guarantee the loan and commit to making payments if needed, but they do not have an ownership stake. The primary borrower usually appears alone on title.

Co-borrowing is more common for home loans than co-signing. But in some cases, such as if your spouse has very poor credit, they may need to co-sign so you can purchase on your own.

What if a Co-Borrower Isn’t an Option? Alternatives to Explore

Finding a responsible co-borrower you trust isn’t always easy. If adding a co-borrower won’t work, here are some other potential solutions:

• Look at down payment assistance programs – State and local groups offer grants and low-interest loans to help cover the down payment and closing costs.

• Ask the seller for closing cost assistance – You may negotiate with the seller to contribute a credit for some or all closing costs at signing.

• Lower your DTI – Pay down debts, especially credit cards, to reduce your debt obligations and improve this key ratio.

• Improve your credit – Build your credit history with responsible card use and on-time payments. Boosting your score can yield better loan terms.

• Save for a larger down payment – Putting down 20% or more lowers your loan amount so you qualify on your own income.

• Choose a different property – Consider lowering your price range or looking in lower-cost areas that better fit your budget.

With creativity and commitment, you may be able to reach your homebuying goal even without a co-borrower.

Final Thoughts on Co-Borrowers

Co-borrowing allows you to buy sooner, afford more, and reduce risk through shared responsibility. But make sure you fully trust your co-borrower, as you are staking your finances and credit on each other. Set clear ground rules upfront on matters like making payments and ownership shares.

Include a co-borrower after careful thought, not just as a quick shortcut to purchase. With good planning and open communication, co-borrowing can be an effective strategy to make homeownership achievable.

Frequently Asked Questions About Co-Borrowers

Can I remove a co-borrower from my mortgage?

Removing a co-borrower typically requires refinancing into a new mortgage in just your name. You’ll need to qualify on your own for the refinance. The co-borrower must agree to be taken off the deed.

Does the co-borrower have to be on the mortgage and deed?

The co-borrower must be on the mortgage to be responsible for the loan. They should also be added to the home’s deed and title to have shared ownership rights.

Can I add a co-borrower to lower my mortgage payment?

If the new co-borrower has strong income and credit, refinancing with them may allow you to qualify for a lower rate and reduce your payment. Adding a co-borrower to an existing loan on its own does not change the payment though.

What happens if my co-borrower stops paying?

You are both still fully responsible for the mortgage, even if the other person experiences financial hardship. Work out an arrangement and communicate with the lender if needed.

Can I qualify for a mortgage with bad credit but a good co-borrower?

Lenders may approve you if the co-borrower offsets your challenges with a strong credit history. You’ll still likely pay a higher rate than with two borrowers with good credit.

Can I add a co-borrower after closing on my mortgage?

You can apply to add a co-borrower after initially purchasing on your own. This requires a formal application and approval process just like the initial home loan.

Co-borrowing is a smart option to explore when buying a home, but weigh it carefully. Make sure to fully assess the implications so you can make the most informed decision.