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My Co-Borrower is A First-time Homebuyer And I Am Not. How Does That Work?
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There are a lot of answers you get when you ask the question, should you add a co-borrower to your mortgage. Many financial experts have different views and thoughts on this subject. Their opinions are based on many factors such as the interest rate, the percentage of your house that the co-borrower would be holding, whether they’re financially stable, etc.
So in order to help you make a well-informed decision, we have outlined some important pros and cons of adding a co-borrower to your mortgage.
It may make sense to have a co-borrower on your mortgage if doing so increases your chances of being approved for a loan. Here is all you need to know if you plan to include a co-borrower on your application.
What is a Co-borrower on a Mortgage?
A co-borrower or co-applicant is an additional borrower on a mortgage. In such a situation, both borrowers complete an application, and the mortgage lender considers both your qualifications and those of the co-borrower like assets, credit history and income. Generally, the borrower who has a better credit profile determines the terms of the loan.
Both you and the co-borrower can have ownership of the property. In simple words, both your names are on the title and are responsible for repaying the mortgage. A co-borrower is not the same as a co-signer. A co-signer does not have their name on the property title but is responsible for repaying the loan.
Usually, a co-signer can be beneficial if a borrower needs assistance from someone with good credit to get approved for a mortgage. If the borrower is unable to pay, the lender has the right to pursue payment from the co-signer.
A borrower can also ask his parent to be a co-signer on a mortgage. For instance, the parent’s credit history and added income and assets can increase their chances of securing a competitive mortgage rate.
Who Can Co-borrow a Mortgage?
Below are the types of people who can be co-borrower or co-applicant on a mortgage:
- Domestic partners
Generally, any adult that is willing to assume legal responsibility for repaying a mortgage and wants ownership of the property can be a co-borrower.
Does It Matter Who is the Co-borrower?
The short answer is that it probably doesn’t matter because both the borrower and co-borrower are equally liable for the mortgage payments and may each have a claim to the property. A co-borrower is typically only an additional party to the borrower listed on the loan documentation.
However, some lenders might designate a “principal borrower.” The standards used by different lenders to identify this person vary. Some people consider the principal borrower as the one who appears first on the application or the person with the larger salary, for example.
When Should I Go With a Co-borrower?
Co-borrowing is ideal in a case when both parties want their name on the property and agree to share the responsibility of paying back the loan. It is generally for the domestic partners or spouses who reside on the same property to be co-borrowers.
Having a co-borrower with a good credit rating can be a plus as it boosts your chances of being approved for a mortgage. If your credit score is on the fairer side, you can get the best possible rate.
It is also a good idea to get a co-borrower when co-borrower’s financial situation means that you can add additional assets and income to your application. A higher income could mean qualifying for a larger mortgage since it shows lenders you can make a higher monthly payment.
Can a Co-borrower be Removed From a Mortgage?
The short answer is yes. However, while it is possible to remove a co-borrower from your mortgage, the process can be somewhat challenging. That is because lenders are usually hesitant to remove borrowers as this can increase the risk, and cuts into their ability to collect payments from both sides.
But, if you still want to remove a co-borrower from a mortgage, you will need to pay fees and take some time. Below are some of the methods that can help you remove a co-borrower from a mortgage.
Speak to your lender: It is the first logical step and sees what a lender can do. Lenders that are willing to remove co-borrowers may require the remaining borrower to requalify for the loan by themselves. That means you will need to have a decent income to make the monthly payments and a good credit profile. A co-borrower will also be required to sign a document, such as a release of liability.
Refinance your mortgage: It is one possible solution if your current lender is not releasing your co-borrower. However, for this, you will need to have good credit and sufficient income and equity to qualify.
Transfer your mortgage: If your mortgage is an assumable loan, you can release the co-borrower and transfer the mortgage to someone else. In this case, your lender will need to review your credit. This process may involve fees.
Sell your home: If you have inherited the property, then selling it and using the money to pay off the mortgage can be an option. It will help release all borrowers from debt.
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