Why Is a Co-Borrower Beneficial?
- Apr. 22, 2014
- Chelsea Beebe
- Personal Finance
When buying your first home, there are a ton of things to consider and one of the most important is whether or not it is in your best interest to bring a co-borrower into your loan. Having a co-borrower can improve your chance of getting pre-qualified for a few reasons:
Lack of Credit History
One of the challenges many first-time buyers face when they apply for a loan is a lack of credit history. Lack of credit history makes qualifying for a home loan difficult because the lender is unable to see how you manage your debt. Establish credit as soon as possible so that this hurdle doesn't affect your ability to purchase. However, even with established credit and a good FICO score, the lender still must find a way to determine your ability to repay; having a co-borrower can change this. The lender will look at the co-borrower's credit history and use this as a basis for determining their ability to repay the loan if the borrower fails to do so. However, if your FICO score is still below the required score, having a co-borrower will not qualify you until your score is raised to the minimum requirement. For tips on how to improve your credit score, click here.
A co-borrower can help lower the debt to income ratio making it easier to qualify. When the lender looks at DTI, they add the co-borrowers income to the total income, which usually if your co-borrower has a higher salary and less debt, should make the total debt to income much less.
After you have been in the home for a few years and are financially stable enough to prove to your lender that you are reliable and able to make your mortgage payments each month, you can refinance your home and remove your co-borrower's name from the title. Because the loan has your co-borrower's name on it, it will show up on their credit report and may impact their ability to get their own financing. This might be an option you want to discuss with your co-borrower so you both have an idea of how long of a commitment your co-borrower will be getting into. For more information on how to remove a co-borrower from title, click here.
Make your Payments On-Time and In Full Every Month
One of the reasons lender's like first-time buyers to have a co-borrower is in case the borrower cannot afford their mortgage, the lender knows that there is someone else who will be paying it. One of the worst mistakes you could make is not paying your mortgage because if you don't, the loan will be defaulted to your co-borrower and this can ruin their credit score and financial standing, along with putting them into debt. If for some reason you find yourself unable to make your payments, speak with your co-borrower about this as soon as possible so you can find the best possible solution to keep your payments from becoming late. For more information on what happens if you don't make your monthly payment in full, click here to learn about Partial Mortgage Payments.
How to Find a Co-Borrower
Consider all of the people in your life who you could ask to co-sign for you if you feel this is an option you want to explore. Your family wants to see you achieve your dream of being a homeowner, and asking everyone from parents, older siblings, aunts, uncles, and grandparents is usually a good place to start. Longtime friends and mentors are another good option to consider as well.