While adding a co-borrower or co-signer is not required to complete a loan application, it can boost your credibility and qualify you for better mortgage loan options.
What is a Co-Borrower?
A co-borrower is any additional borrower on the loan who accepts equal responsibility for loan payments AND equal ownership of the property or investment (i.e. their name is also on the property’s title). Additionally, their income, assets, and credit history are considered alongside yours to determine which loans you both qualify for. And in the case that you default on the loan and can’t pay, ownership will be granted to the co-borrower.
Note that credit history is not the same as credit score. Usually the lowest credit score [link to post] is used on the application.
So if you add a co-borrower with a better credit profile, you’ll likely receive better loan offers. But if their credit profile is the same or worse than yours, then your options remain the same as if you applied individually. And adding a co-borrower with a much lower credit score could even hurt your application.
Normally co-borrowers are family members or spouses who live on the same property. But you don’t have to add your family member or spouse as a co-borrower just because you share the same residence. You can share the title without sharing the mortgage loan. This would make sense if your spouse’s income, assets, and credit history are significantly worse than yours.
When should I add a co-borrower?
Co-borrowing works best when all parties want to share ownership and agree to share payment responsibility. Especially if the primary applicant (i.e. you) are hoping for a large loan, applying with co-borrowers will increase your chances of qualifying.
If the co-borrower has better financial habits and credit history, it could also ensure you receive lower interest rates and monthly payments because your overall debt-to-income ratio (DTI) average will be lower. A low DTI assures lenders that you are trustworthy and fully capable of repaying your loan.
Bottomline: You are adding their assets and income to your application. If doing so helps you qualify for better loan terms and you can trust that they’ll consistently pay their portion (and they agree to do it), then you should definitely add a co-borrower.
What is a Co-Signer?
A co-signer is any additional borrower on the loan who accepts equal responsibility for loan payments BUT NO ownership of the property or investment (i.e. their name IS NOT on the property’s title). Their assets, income, and credit history, however, are still considered alongside yours to determine which loans you qualify for. And in the case that you default on the loan and can’t pay, the co-signer does not gain ownership and you could lose the property.
Normally a co-signer is a parent of the borrower. So if you are a first-time home buyer looking for a mortgage loan, you might ask your parent to be a co-signer. This way you benefit from their good credit and can get approved for better mortgage loans, and additional financial support when paying. But your parent will not be a co-owner of the property (and would most likely not live with you).
When should I add a co-signer?
As mentioned above, co-signing works best with first time borrowers who have very little credit history. If the primary borrower (i.e. you) is ready to take full responsibility and ownership of the property or investment, then adding a co-signer with better income and assets can help you start building good financial credit for the future.
Note: the co-signer is only liable if the borrower defaults.