The process of purchasing a house isn’t as simple as renting a house or an apartment. Mortgage lenders typically request more documentation than landlords; and whereas a landlord may overlook a poor credit history, lenders aren’t as forgiving. Mortgage applications are scrutinized, and unfortunately, banks reject a lot of applicants.
If you’re rejected for a home loan, a bank may reconsider its decision if you re-apply with a co-borrower. A co-borrower appears on the mortgage loan with you, and the bank takes this person’s income, credit and assets into consideration when determining whether to approve the application. A co-borrower can be anyone such as a spouse, a parent, sibling or child. This person has ownership interest in the property and is equally liable for the mortgage debt.
Having a co-borrower isn’t a requirement for a mortgage loan, yet it can be helpful if you’re having trouble getting a loan on your own. Before you proceed, here’s what you should know about adding a co-borrower to your mortgage.
Adding a Co-Borrower Doesn’t Guaranteed a Better Mortgage Rate
Mortgage borrowers with the highest credit scores qualify for the best mortgage rates. If you apply for a mortgage with a low credit score, you might think a co-borrower’s excellent credit history will help you qualify for a better mortgage rate, but this isn’t always the case.
When two people apply for a joint mortgage, mortgage lenders do not use the highest score or an average of both credit scores when determining the rate. Instead, the mortgage rate is based on the lowest credit score. It doesn’t matter if your co-borrower has an 800 credit score. If you have poor credit, the lender will use your score to underwrite the mortgage because it’s the lowest of the two.
A Co-borrower Helps Lower Your Debt-to-Income Ratio
Having a co-borrower can strengthen your mortgage application, especially if you have a high debt-to-income ratio (DTI). Your debt-to-income ratio is the percentage of monthly income that goes toward debt payments. To qualify for a mortgage, your DTI (including the mortgage payment) should not exceed 36%. A high DTI can reduce purchasing power.
Before approving a mortgage, the bank will review your income and debts to determine how much you can afford. The more you owe on credit cards, auto loans and student loans, the less you can spend on a property. If debt limits your purchasing power, a co-borrower may help. Since mortgage lenders include a co-borrower’s income and assets when underwriting the application, applying with a co-borrower can result in a lower DTI and help you qualify.
There’s just one caveat.
Some mortgage lenders do not allow non-occupant co-borrowers on mortgage loans, and depending on the type of loan program, a non-occupant co-borrower’s income cannot be used for income qualification purposes. If you’re thinking about adding a co-borrower, make sure you understand the bank’s guidelines.
