There are many potential home buyers in the US who may have difficulty getting a home loan in 2018 on their own. Experts recommend that they add a co-borrower to the mortgage application. With the co-borrower’s income, it may be more likely that you can get approved for a home loan.
If you are considering getting a home loan and think you may need a co-borrower, please continue reading, as we will explain more about co-borrower requirements for 2018 for various types of co-borrower home loans.
Definition of a Co-Borrower
A co-borrower is simply another person, usually a member of the family, who is added to the mortgage and is a guarantor of the mortgage loan. There are both occupying and non-occupying co-borrowers. A co-borrower who is a non-occupant can use their income to assist the borrower to get approved for the mortgage.
People use co-borrowers usually because they need more income to qualify, or their debt to income ratio is too high.
Can a Co-Borrower Help You with Credit?
If you want to get approved for a home loan with a lower credit score, you may think that your co-borrower can improve your chances of being improved. This is not usually the case.
FHA and conventional loans do allow for a co-borrower who does not live in the home. However, lenders will use the borrower with the lowest credit score to determine if the loan can be approved.
A co-borrower is typically used where the primary borrower has a debt to income ratio that is too high or their income is not high enough to be approved for the home they want. Another common reason a co-borrower is used is that the primary borrower’s credit score is too low to qualify for the interest rate he wants. So, even with a bad credit mortgage, the underwriter will use the lowest credit score when considering qualification.
So, if your credit score is too low to be approved for a mortgage, a co-borrower is not going to be much help. Remember though that it is possible to be approved for a loan with a quite low credit score these days. FHA mortgage lenders can technically approve applicants with a credit score as low as 500, and 580+ for a 3.5% down payment. Even after a foreclosure or buying a home after a bankruptcy, you may have a credit score well above 500.
What Is the Difference Between a Co-Borrower and a Co-Signer?
A co-borrower is listed on the title, has ownership interest in the property, is required to pay the monthly payments, and also must sign all loan documents.
A co-signer does not have any ownership interest in the property, is only listed on the mortgage note, and is not liable for repaying the debt. However, if you do not pay the mortgage, your co-signer’s credit will be damaged.
Co-Borrowers and FHA Loans
People who have credit challenges, as we note earlier, should consider getting an FHA home loan. With flexible credit guidelines, flexible debt to income ratios, no minimum or maximum income, and low FHA interest rates, FHA are typically the mortgage of choice for low credit borrowers.
FHA allows you to have two non-occupant co-borrowers. This makes it quite a bit easier to qualify for your home loan. However, your co-borrowers need to meet these requirements:
- Have a minimum qualifying credit score; will depend upon the lender
- Must live in the US
- Must be a close friend or relative
- Name must be on the mortgage and title
Co-Borrowers and Conventional Loans
You also can have a non-occupying co-borrower on a conventional loan. As with an FHA loan application, the mortgage lender will use the lower credit score among the borrowers to determine if you are approved or not. Ask about the Home Possible Programs from Freddie Mac or the Fannie Mae Home Path Loans.
These are the typical requirements for a co-borrower on a conventional loan:
- Must have a FICO score of at least 620 to 640
- Does not have to be on the property title
- Must be a relative or close friend
- Must reside in the US
When Should I Have a Co-Borrower?
A co-borrower can help you if your debt to income ratio is too high to qualify for a loan. It also can help you if your income is too low to qualify for the home you want.
Keep in mind that if you have a co-borrower, both of you are responsible for the loan. Both parties’ credit scores will be affected both by paying the mortgage and not paying the mortgage. Be certain that your co-borrower understands that he or she is just as responsible for the loan as you are.
Co-Borrower Refinancing Options
If you have a co-borrower on your mortgage today due to your financial circumstances, you do have the option of refinancing into another mortgage without your co-borrower later. You can refinance the loan just into your name.
If you have an FHA insured loan, you can get a simple FHA streamline refinance after only 210 days. With a streamline refinance, you can get a new loan hopefully at a lower interest rate. No credit or income check is needed, and the old appraisal is used to value the home. Most people can get a streamline refinance done in a few weeks.
Getting a co-borrower is a solid option for the home buyer who needs to lower their DTI or to increase their income to qualify for a loan. Be sure you understand all of the requirements for co-borrowers for the type of loan you are getting – FHA, VA, USDA, conventional, etc.