How does a co-borrower for a mortgage work?
When one person applies for a mortgage on their own, that person is the sole borrower on the loan. When multiple people apply for a mortgage together, they are co-borrowers on the loan. In short, a co-borrower is anyone who is listed on the mortgage note other than the first borrower.
While a co-borrower is typically a spouse, partner or relative, they can also be a friend or colleague. Co-borrowers usually live in the property being financed together but this is not a requirement. In most cases the co-borrower holds an ownership interest in the property regardless of if they occupy it. Someone listed on the mortgage that does own a stake in the property is usually referred to as a co-signer.
Applying for a mortgage with a co-borrower offers potential advantages and disadvantages, depending on the financial and credit profile of the applicant. Continue reading to learn how a co-borrower for a mortgage works so you can determine the best approach for your loan application.
What You Should Know About Mortgage Co-Borrowers
The Co-Borrower is Legally Responsible for the Mortgage
If you are listed as a borrower on the mortgage, you are legally obligated for the loan. This means that you are responsible for the monthly payments and ultimately repaying the mortgage.
This legal responsibility applies regardless of if you live in the property being financed or if you are only responsible for a portion of the monthly payment according to an agreement you have with the other borrower. Simply put, all borrowers are viewed equally from the lender’s perspective and held accountable for the mortgage.
Because you are responsible for the mortgage, the monthly payment is factored in if you apply for another loan. For example, if you apply for a car loan or another mortgage, the payment is included in your debt-to-income ratio, which can may it more challenging to qualify for the loan. Again, this guideline holds true even if you do not occupy the property.
You can only exclude the mortgage payment -- and property tax and homeowners insurance -- from your debt-to-income ratio when you apply for another loan if the other borrower listed on the mortgage has made the monthly payments for at least twelve months. To meet this lending guideline you are required to provide cancelled checks, bank statements or similar documents that show that the other borrower made the mortgage payments on time and in full for at least one year.
The Mortgage Affects the Co-Borrower's Credit Score
It is important to understand that if you are a co-borrower on a mortgage, the loan appears on your credit report and can impact your credit score. For example, if you miss a payment, become delinquent on the loan or experience another negative credit event such as a default or foreclosure, your credit score may be significantly negatively impacted. This is why it is important that you trust the other borrower on the mortgage and are confident that collectively you can afford the monthly payments.
The Co-Borrower’s Income and Debt Are Included in the Mortgage Application
The lender includes the monthly gross income and debt expenses for all co-borrowers in the debt-to-income ratio to determine the mortgage you can afford. If your co-borrower has significant monthly income relative to their debt payments, then the co-borrower should enable you to qualify for a higher mortgage amount. However, if the co-borrower has high debt expense relative to their income, then you may be able to afford a higher loan amount on your own as a sole applicant.
Use ourTWO PERSON MORTGAGE QUALIFICATION CALCULATORto determine what size loan two borrowers can afford
Additionally, if the co-borrower does not plan to live in the property being financed, then their housing expense such as their monthly rent or mortgage payment is also included in your combined debt-to-income ratio when you apply for the loan. This can make it more difficult for you to qualify for a mortgage or reduce the loan amount you can afford.
Another point to consider is that some mortgage programs apply applicant income limits. If a co-borrower earns too much money, including them in your application may cause you to exceed the income limit and you may not be eligible for the program. We recommend that you review this point with your lender before you apply for the mortgage.
Lenders Average the Middle Credit Score for Both Borrowers to Determine Your Mortgage Terms
When two people apply for a mortgage as co-borrowers, the lender averages the middle of each borrower's three credit scores, also known as their median score, to set your loan terms including your mortgage rate. For example, if your scores are 700, 760 and 800 and your co-borrower’s scores are 700, 720 and 740, the lender averages 760 (your middle score) and 720 (the co-borrower's middle score), which is 740, to determine the score used in your mortgage application. If a borrower only has two credit scores, the lender uses the lower score to calculate the average score.
If your co-borrower's credit scores are lower than yours, the average score used by the lender is lower than if you applied for the mortgage on your own as a sole applicant. For some mortgage programs, borrowers with a lower credit score pay a higher rate, and vice versa.
Paying a higher mortgage rate increases your monthly payment and potentially reduces the loan you can afford. If the credit score used by the lender is too low, you may be ineligible for certain loan programs. This is why a co-borrower with a low score may be a disadvantage when you apply for a mortgage while a co-borrower with a higher score may be helpful.
The table below shows mortgage rates and fees for top-rated lenders near you. We recommend that you contact multiple lenders to confirm the loan you qualify for with a co-borrower and to find the most competitive mortgage terms. Shopping multiple lenders is the best way to save money on your loan.
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The Co-Borrower Does Not Need to Live in the Property
As referenced above, you do not need to occupy a property to be a co-borrower on a mortgage -- this is called being a non-occupant co-borrower. Depending on the loan program, however, the lender may limit the debt-to-income ratio for the borrower who lives in the property, which may reduce the maximum mortgage amount you can qualify for. If you are considering having a co-borrower who does not plan to live in the property, make sure to understand how this approach affects the loan you can afford.
Property Ownership Requirements for a Co-Borrower Vary
To take out a mortgage on a property you live in, you are required to hold an ownership interest in the property. Non-occupant co-borrowers are not required to own the property being financed but many do.
As referenced above, if an individual is listed on a mortgage but does not hold an ownership interest in the property, then the individual may technically be a co-signer or guarantor on the loan. Although the difference between a co-borrower and co-signer is somewhat technical, it is important to review this point with your lender when you apply for the mortgage because the qualification guidelines may be different.
In conclusion, a co-borrower for a mortgage can be helpful but it may also be disadvantageous in certain situations. We recommend that you consider all your options -- including applying as a sole borrower or with a co-borrower -- to understand the best way to achieve your mortgage goals.
Sources
"B2-2-01, General Borrower Identity Criteria." Selling Guide: Fannie Mae Single Family. Fannie Mae, July 28 2015. Web.
"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, Debts Paid by Others." Selling Guide: Fannie Mae Single Family. Fannie Mae, February 5 2020. Web.
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