Co-Borrower

“Neither a borrower nor a lender be,” Shakespeare opines in Hamlet. This may sometimes hold true for a co-borrower as well. Perhaps you are tired of paying rent and want to buy your first home, but haven’t been able to qualify for a mortgage loan. So, even though you’ve tapped out your parents (who paid for your college tuition, your first car and all your food for the first 18-25 years of your life), you ask them to be your co-borrower on the loan application.

A co-borrower is any additional person whose income and credit score will be considered in order to qualify for any type of loan. Their name will appear on all the loan documents as well as on the deed to the property, and they will be liable for repaying the loan should the other borrower decide to quit paying. Most of the time a co-borrower is a spouse, but it could also be a friend or relative who does not intend to live on the property. If you think you need a co-borrower because your credit score is low, unfortunately lenders use the lower score when making their decision. But another income on the loan application certainly helps, if your debt to income ratio is too low. This ratio is calculated by adding up all your monthly debts and dividing them by your gross monthly income. Debts should not be more than 35% of your income for a mortgage loan.

There is some risk to the co-borrower. Even if the borrower makes all mortgage payments on time, the co-borrower’s credit score could be impacted, making it harder to qualify for a car or other loan because now their debt to income ratio is higher. A good alternative is to refinance the loan as soon as the borrower can qualify on his or her own. With FHA loans, you can refinance in as little as 210 days with a streamline refinance. There will be no credit check and it requires little documentation. So, hopefully the borrower will get that second job soon...