I am a co-borrower on a mortgage with a relative. When I applied for another loan the lender included the payment for that mortgage in my debt-to-income ratio but does not factor in the income from my relative. Is that fair?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

The situation you described may not be fair or practical but it is consistent with lender guidelines. When you apply for a mortgage or other loan, lenders include all monthly debt obligations you are responsible for including mortgage, property tax, homeowners insurance, rent, credit card and car, personal and student loan payments. The lender also uses the monthly gross incomes for all borrowers on the loan application to calculate the debt-to-income ratio used to determined what size loan you qualify for.

Review the Debt-to-Income Ratio for a Mortgage

If you are listed on a mortgage, even as a co-borrower with a relative, then that monthly payment -- plus property tax and homeowners insurance -- is factored into your debt-to-income ratio when you apply for another loan. The way a debt-to-income ratio works, the higher your debt expense, the lower the mortgage amount you can afford.

Even if you only pay part of the mortgage and you are a co-borrower on paper only, lenders include the full monthly housing expense in your debt-to-income ratio because you are legally responsible for the loan and property.  For example, if your relative loses their job, you may be required to make that mortgage payment.  I am not suggesting that is going to happen but that is the position lenders take from a risk standpoint.

If you are a co-borrower on a mortgage, you can only exclude the payment from your debt-to-income ratio when you apply for another loan if the other co-borrower has made the monthly payments for at least twelve months.  To satisfy this requirement you need to provide cancelled checks, bank statements or similar documents that show that the co-borrower -- your relative in this case -- made the mortgage payments on time and in full for at least one year.

The only way to have to have your relative's income included when you apply for the other loan is to have them listed as a co-borrower on that loan application. If they are listed as a co-borrower, the lender also includes their monthly gross income (and debt) to determine what size loan you qualify for.

Use our MORTGAGE QUALIFICATION CALCULATOR to determine the mortgage you can afford based on your monthly gross income and debt expense

Assuming your relative does not have excessive non-mortgage monthly debt, his or her income should offset the extra mortgage expense the lender includes in your debt-to-income ratio and help you qualify for larger loan amount, together.  But to reiterate, the only way the lender includes income from an additional individual, such as your relative, is if that person is listed as a co-borrower on the loan.

To summarize, if your relative agrees to be a co-borrower you should be good to go with the other loan. If he or she does not agree to be a co-borrower, then the mortgage you have together is factored into your debt-to-income ratio -- unless they have made that mortgage payment in full for a year -- but his or her monthly gross income is not. Although this approach may not seem fair, this is how lender underwriting policies apply to your situation.

One final option to explore is to consider having the co-borrower pay you rent for all or part of the mortgage payment.  If you can show lenders that you consistently receive rent from a co-borrower, you may be able to include this income when you apply for other loans.  Increasing your monthly income improves your debt-to-income ratio and increases the mortgage or other loan amount you qualify for.

If you take this approach, make sure you keep documents such as tax returns, bank statements, cancelled checks or a signed lease agreement that verify the rental income you receive from the co-borrower.  While mortgage lenders typically require two years of tax returns to include rental income in your loan application some lenders may permit you to use alternate documents and require a shorter income history.

The table below shows mortgage terms for leading lenders in your area.  We recommend that you contact multiple lenders to understand how being a co-borrower impacts your ability to qualify for a new mortgage.  It is important to shop lenders as qualification guidelines vary. 

Sources

"B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, June 5 2018.  Web.

"B3-6-05, Monthly Debt Obligations."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.

"B3-6-05, Debts Paid by Others."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.