Have your financial circumstances changed since you bought your home? If your credit score fell or your debt ratio increased, you may find it harder to get a mortgage now than when you bought the home. What if you could get the help of a co-borrower though? Would that help?
In some cases, a co-borrower can help. Keep reading to find out if finding a good co-borrower can help you.
Did Your Credit Score Fall?
Unfortunately, co-borrowers can’t be much help when it comes to credit scores. Lenders look at the middle credit score of each borrower. They then take the lowest middle score between the two borrowers to use for qualifying purposes. If you have worse credit than your co-borrower, the lender will use your credit score.
Here’s an example:
Your three credit scores are 649, 667, and 692
Your co-borrower’s three credit scores are 684, 691, and 695
Your middle credit score is then 667 and the co-borrower’s middle credit score is 691. The lender will use your score of 667 to qualify you for the loan. This credit score should be good enough for a variety of loan programs, but if you have a credit score much below 640, you may find it harder to find a loan program.
Did your Debt Ratio Increase?
Your debt ratio is the comparison of your debts to your gross monthly income. Each loan program has its own maximum debt ratio requirements, but in general, the total debt ratio shouldn’t exceed 41% – 43%.
If your debt ratio greatly exceeds these amounts, you may need a co-borrower to help bring your debt ratio down. Because your co-borrower goes on the loan, the lender can use his/her income to help you qualify for the loan. Here’s the catch, though. If you use the co-borrower’s income, the lender must also include his/her debts. If your co-borrower has a large amount of debts, adding him/her onto the loan may not help.
If you are lucky enough to have a co-borrower that doesn’t have a lot of debts, though, it can help you get qualified for the loan.
The Difference Between the Co-Borrower and Co-Signer
Don’t confuse the two terms co-borrower and co-signer. A co-borrower is on the loan and the title. He/she has rights to the property. This person is also liable for the mortgage. The co-borrower signs all of the loan documents. The co-borrower has a say in what happens to the property, including selling it.
A co-signer is on the mortgage note, but not on the deed. This means that the co-signer also is not on the title. The co-signer does not have ownership in the property. He/she cannot decide to sell the property or make changes to it. The co-signer is still liable for the mortgage payments should you stop making payments.
Should you Use a Co-Borrower?
Now the big question is whether you should use a co-borrower. Typically, the best co-borrower is your spouse. You don’t have to worry about ownership issues when you own the home with someone you are married to. Of course, if you get divorced, you’ll have to split the property or work out a settlement with your lawyers, but the law covers you in this situation.
If you aren’t married and you need a co-borrower, you’ll have to choose someone wisely. Buying with a friend, for example, can be risky. You need a lawyer to help draw up the proper agreement for the ownership to ensure that both parties are properly covered should a disagreement regarding ownership occur. If you can qualify for a loan without a co-borrower, you may be in the best position.
Increasing Your Chances of Approval
If you can’t qualify for a refinance on your own, but don’t want a co-borrower, you can try fixing the issues that prevent you from getting approved. For example:
- Pay your bills on time to help your credit score increase
- Pay your debts down to increase your credit score and decrease your debt ratio
- Avoid taking out any new debt to help your credit’s age increase, which helps your credit score
- Take on a side job or second loan to help decrease your debt ratio
These simple tips can help you maximize your chances of approval without using a co-borrower. If you do need to use a co-borrower, make sure you choose wisely to ensure that you have the best chance at approval.