Definition Of A Co-Borrower
Sometimes, a potential home buyer finds that they are not able to qualify for a mortgage without help from a friend or family member. In this case, they may seek the help of a co-borrower.
A co-borrower is someone who is willing to accept responsibility for repaying a debt in addition to the primary borrower on the loan. A co-borrower is obligated to pay the loan if the primary borrower does not do so. Because of this big obligation, the federal government requires that all co-borrowers see the following notice:
You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.
The lender can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.
This notice is not the contract that makes you liable for the debt.
Depending upon the laws in your state, the sentence about the lender trying to collect a debt from the co-borrower without first trying to collect from the borrower may be removed if this is illegal.
A co-borrower will have their financial information scrutinized in the same way as the primary borrower. Whether you qualify for a loan, and the rate you receive will depend upon both parties. Both parties will be responsible for the loan payment each month, and both parties’ credit scores will be affected if payments are late or missed. Conversely, both parties are also helped when payments are made in a timely fashion.
Is A Co-Borrower the Same Thing As A Co-Signer?
Many people view these two as one and the same. However, they are actually different.
A co-borrower is on the title to the property, is on the mortgage note, and must sign the security instrument. When determining a loan, the co-borrower’s income, credit score, assets, and liabilities are included when determining if the loan will be given.
A co-signer, on the other hand, has no interest in the property. Although their income and credit worthiness are used to determine if a loan will be made and although they will be responsible for the repayment of the loan if the primary borrower doesn’t pay, they do not hold the title.
In simple terms, a co-borrower is equal on the loan with the primary borrower. A co-signer simply states that they are willing to be the back-up in case you aren’t able to make your payments.
When Would You Need A Co-Borrower?
Sometimes the loan you wish to take out is larger than your income alone will allow. If you need a larger loan than your debt-to-income ratio allows, you may find that a co-borrower is the way to go. They will be in partnership with you for the loan, their income will be used to determine the LTV ratio, and this will increase the size of loan you can obtain.
You might also need a co-borrower if:
- Your credit score is low.
- You have no or little credit history.
- Your job history is too short.
- You don’t have enough money saved for a down payment.
With a co-borrower, the lender may be able to approve your loan because they see it as less risky. They have the protection of a second payer.
Disadvantages To Having A Co-Borrower
If you don’t make the payments on your loan, your co-borrower will have to. This can ruin a good friendship or relationship if you aren’t careful.
If your co-borrower is not your spouse, you need to think about the tax implications. Both co-borrowers will benefit from the income tax interest deduction. This means that the tax deduction needs to be split equally between the borrowers. For those needing tax deductions, this will reduce the amount you can write-off.
Finally, you need to think about what will happen if your co-borrower were to die or go through a divorce. You will be legally bound to make payments if your co-borrower does not. Make sure that you think through the financial implications of becoming a co-borrower or using a co-borrower before you sign the papers.
