One of the more frequent questions we get asked from prospective borrowers is if adding a friend or family member to their loan will help them qualify for a mortgage. The answer to this question is that it depends. There are some clear advantages and disadvantages to having a co-borrower on your loan application. We will outline when it would make sense to have a co-borrower and what the drawbacks of being a co-borrower may look like.
The number one scenario where it makes sense to add a co-borrower to your loan is if you need additional income to qualify. It is not uncommon for borrowers to find themselves in a scenario where their actual income is substantially more than their qualifying income due to underwriting guidelines throwing off the calculation.
For example, let’s assume that you recently switched jobs but had a gap of employment for a number of months and you are no longer eligible to use bonus or commission income. You know that you will continue to receive this income to afford a higher monthly payment but it can’t be included in the qualifying income calculation. In this specific scenario adding a co-borrower to your loan to help with your debt-to-income ratio could make sense.
Another advantage to having a co-borrower is the potential to pool resources. Maybe one of you has strong income, the other has large amounts of assets and you are both going to be on title. Going on the home loan together can be a great way to continue splitting the responsibilities of ownership. Do note that just because you are on title, it does not mean you have to go on the loan.
A scenario where it may not make sense to add a co-borrower to your loan is if you are adding them because they have better FICO credit scores than you. This is a common misconception as when qualifying for a mortgage, unlike when qualifying for an auto loan, the lowest FICO score between the borrowers is considered when determining the interest rate. Having a co-borrower with only a strong FICO credit score will not provide any benefit.
The person helping you to qualify needs to be a relatively strong borrower. A co-borrower simply having a strong income will not always bolster qualifying if they have a heavy debt burden or other properties that aren’t reporting positive cash flow.
Additionally, anytime you are a co-borrower on a mortgage you are responsible for the entire mortgage debt making it harder to qualify for future loans for yourself. If there are any missed payments or late payments, it will affect all borrowers on the mortgage. This is something that you will want to keep in mind should anyone ask you to become a co-borrower.
Last, consider an exit strategy. What happens if you, the co-borrower, want to be removed from the loan in the future? Is there a plan to refinance and remove you? What if one person wants to sell the property and the other does not? Will the other party be able to refinance and qualify for the mortgage on their own? These questions can oftentimes be addressed with a vesting agreement and written agreement between the co-borrowers.
If you have any further questions about this topic please feel free to give us a call.