If you can’t qualify for a mortgage on your own, you might look to someone for help. You have two options – a co-borrower or a co-signer. They can both help increase your chances of getting a loan. However, they both have different impacts on your home loan. We discuss them in detail below.
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What is a Co-Borrower?
A co-borrower is commonly your spouse or someone you plan to live with in the home. This person applies for the loan with you as the ‘joint applicant.’ He/she must answer the same questions the main borrower must answer.
The lender will evaluate all of the following from the joint borrower:
- Credit score
- Debt ratio
Your co-borrower can help or hurt your chances of loan approval depending on their financial situation. For example, many lenders take a borrower’s middle credit score from all three credit bureaus. If there are two borrowers, though, they take the lowest middle score between the two borrowers. If your joint applicant has a lower middle score, it could hurt your chances of approval.
Another issue arises if a co-borrower has significant debts. They get worked into your debt ratio. If the ratio is too high, it could ruin your chances for approval.
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Before you apply for a loan with a joint applicant, make sure you know enough about their financial life. Discuss their credit history and their current labilities versus your combined income. This will give you a good idea whether the joint applicant will help or hurt your situation.
What is a Co-Signer?
A co-signer is different from a co-borrower. They do not live in the home. They are a ‘back up’ for the main borrower. They let the bank know that they will pay the loan if you become unable. The main role of a co-signer, however, is to help your application look better. This person generally has a higher credit score and/or income. Both of these factors are meant to help you get approved for the loan.
In the eyes of the lender, this person makes it less risky to lend you the money for the home. It may help you get approved for a higher loan amount or even secure a lower interest rate. This person does not make mortgage payments on a regular basis, but will become responsible if you stop making the payments yourself.
The Main Difference
You might think the co-borrower and co-signer sound similar. They both help you get approved for a loan. That much is true. However, there is one main difference.
Co-signers do not have interest in the property. They do not have any right to the property or any say if you decide to sell it. You do not have to share the profits from the sale with this person either. They do not sign all of the documents at the closing, including the deed.
Co-borrowers do have an interest in the property. They have equal rights to it. You cannot sell the home without first getting the co-borrower’s consent. The co-borrower signs every document at the closing that you sign, including the deed.
Alternatives to Having a Joint Applicant
If you know you have bad credit, you have another alternative. You can wait to apply for a loan and try to fix your credit. There are a few quick fixes you can apply to your credit that will help your score increase:
- Bring all accounts current and keep paying them on time
- Pay down any high balances so your utilization rate is lower
- Don’t close any current accounts
- Don’t open any new accounts unless you don’t have enough accounts to help your credit
- Clear up any collections or other negative events on your credit report
The choice is yours when determining whether a co-borrower or co-signer is necessary. They both have their pros and cons. Anyone that takes on the responsibility with you, however, should know they are liable for the loan. They should prepare themselves for the worst case, just so they are taken off guard. If the loan does go unpaid, everybody that is on the loan will have a damaged credit score. If everyone is on the same page, the process can go smoothly though.