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December 11, 2019

How to use a co-borrower for mortgage loans in 2022

Erik J. MartinThe Mortgage Reports Contributor

November 30, 2021 - 6 min read

A co-borrower for your mortgage loan can help you buy a house

It can be tough to buy a house. Modest income, low credit scores, and high home prices can all stand in the way.

But if you find a co-borrower, getting a home loan could be much easier.

A co-borrower applies for the loan with you, and their credit and income can help boost your eligibility.

But that person is also on the hook if you can’t make your mortgage payments. So be sure to check your own financing options first. You might be more qualified to buy a house right now than you think.

What is a co-borrower?

A co-borrower, sometimes called a ‘co-applicant’ or ‘co-signer,’ is someone who takes out a mortgage loan with you to help you afford the purchase price of a home. A co-borrower might help you qualify for the loan by adding a stronger credit score or bigger income. Although the co-borrower doesn’t have to live in the home with you, they will share in the financial responsibility for your mortgage.

Two types of co-borrowers

Rick Scherer, CEO of OnTo Mortgage, says there are two types of co-borrowers.

“An occupant co-borrower is someone who will purchase the home with you and live in the property as a primary residence.

“A non-occupant co-borrower will not live in the property but will assist you in qualifying for the property,” he says.

Although a non-occupant co-borrower isn’t expected to make regular monthly payments, they are still considered responsible for the mortgage.

As Bruce Ailion, Realtor and attorney, explains, a co-borrower “becomes jointly and severally liable for the debt on the loan. If you as a borrower are not able to pay back the loan, the co-borrower will be called upon to pay this debt.”

Marvin Smith with DKR Group LLC is the author of “The Psychology of Credit.” He says the co-borrower’s name appears on your loan’s documents and the property’s title.

“This person’s income and credit history are used to help you qualify for the loan,” Smith says.

What’s the difference between a co-borrower and a cosigner?

A non-occupant co-borrower might also be called a “co-signer.” As explained above, this person is legally obligated to assume loan repayment when you cannot. But they are not expected to make any loan payments. They serve as a guarantor on the loan without any ownership interest of the real estate property.

And, unlike an occupant co-borrower, a non-occupant co-signer will not live in the property. This is why many end up cosigning a mortgage with parents.

When a first-time home buyer might need a co-borrower

There are many scenarios today where co-borrowing can make sense.

Young buyers in expensive cities
First-time home buyers with lots of student debt
People with high debt-to-income ratios (DTI)
Retirees with little income flow
Self-employed people without tax returns

For example, maybe you are a young worker who wants to live in a big city where home prices are too high.

Or you recently graduated from college with large amounts of debt from student loans; now you need help qualifying for a mortgage.

On the other hand, say you are a retired parent with little to no income. Getting your adult child to be a co-borrower can help you downsize or purchase another home.

“All of these people make great candidates for seeking a non-occupant co-borrower,” Scherer says.

“Another scenario we sometimes see is a college student lacking income whose parents want him to live in a home they will co-own.”

Or, say you’re self-employed. It can be hard to demonstrate sufficient income to a lender.

“But if a family member jumped onto the loan application with you, it could help you qualify,” adds Scherer.

Who can be a co-borrower on a mortgage application?

Ailion says most co-borrower situations involve family members and personal relationships.

“It increasingly takes more than one income to qualify for a home today. That’s where relatives can help,” explains Ailion.

But in some situations, folks who aren’t related to you can make good co-borrowers, too.

“This often happens in an investment setting,” Ailion says. “A person with poor credit may find a great home to flip but lack the money or credit to buy that home. So they may secure an investor — someone they’ve never met before — to put up the money and credit in exchange for a share of the profit when the property sells.”

The ideal co-borrower is someone with great income, low debt, and a good credit score (at least above 740).

Scherer suggests that the ideal prospect is someone with great income, low debt, and a good credit score.

“You want to ask someone who has enough income that washes away their own expenses and still has plenty of money left over to prop up your side of the balance sheet,” says Scherer.

“This person should not have a lot of debt. And he or she should have a higher credit score than you. Their score should at least be above 740.”

Your ultimate goal should be to get the co-borrower off the loan

Keep in mind that getting your co-borrower off of your home’s title should be any homeowners’ long-term goal.

“Anyone looking to help you out will want to know your exit strategy and the plan to remove them from future liability,” says Scherer.

Refinancing the home loan is a popular way to remove the co-borrower from the loan and title. A refinance can also be an opportunity to qualify for lower interest rates and decrease the monthly payments

You’ll also want to talk about what happens when it’s time to sell the home.

If it’s a non-occupant co-borrower, how much equity should this person pocket, for example?

This is especially important if you’re buying an investment property with a co-borrower as a joint venture. You’ll want to solidify details about profit-sharing before anyone puts their name down on the loan.

Where to get a home loan with a co-borrower

Scherer says a non-occupying co-borrower loan is very common.

“It’s offered for conventional loans by both Fannie Mae and Freddie Mac,” notes Scherer. “And some other loan programs offer them, too, like an FHA loan. But certain restrictions apply.”

Ailion points out that virtually all lenders will permit occupying co-borrowers on a loan. And he says co-borrower mortgages are offered via portfolio loans from banks and credit unions, as well.

Alternative loan options for low credit or low income

When a borrower’s credit score is poor and they are not willing to add a co-applicant, they may qualify for alternative loan programs.

Adam Spigelman is vice president at Planet Home Lending. He says that if you decide against using a co-borrower, there are other options that may allow you to count roommate or partner income toward your mortgage.

Fannie Mae HomeReady Loan

“One option is Fannie Mae’s HomeReady program,” says Spigelman. “This is a low down payment mortgage that lets you use boarder income for up to 30% of the income you need to qualify for the home loan.”

Fannie Mae HomeReady loan
As little as 3% down
Include a roommate’s income to qualify
Cover up to 100% of the down payment with gift funds

This could be a good solution for a couple with one partner who has credit issues and cannot qualify for a mortgage.

“It would also appeal to a recent graduate with student debt who doesn’t want to share ownership of the home but needs extra income to qualify,” suggests Spigelman.

FHA loans or VA loans

FHA and VA loans are government-backed mortgages that have less stringent minimum credit score requirements and flexible guidelines around debt-to-income ratios and down payments.

Both government programs also have different rules for loan qualification and underwriting. So speak with your mortgage lender about these co-borrower alternatives.