The concept of adding a co-borrower is a common practice in the mortgage industry. It’s a practical move to share the costs of holding a mortgage or help you qualify for a bigger loan that you might not be approved on your own. In the initial or later stages of mortgaging, you can put in another name as a borrower to your loan.
During the Application
When you ask a spouse, a friend or a family member to sign up on a mortgage with you, you are basically “pooling” all your income, assets and credit history together.
With the ability to repay rule in place, lenders are required to do a capacity check requiring traditional or alternative documentation as in the case of stated income loans. In the course of this verification, they might find that your monthly debts relative to your monthly income, as measured by the DTI ratio, is too high. If your co-borrower has a steady income (and that he/she has a lower debt-to-income ratio), it will help you qualify.
Similarly, you and your co-borrower could add your assets such as cash deposits, stocks and bonds to qualify for a loan with a bigger amount perhaps. Lenders check assets to see if these could support your closing costs, fees, and mortgage payments. There is also a reserve requirement that depends on the type of property you are buying.
To be clear, a co-borrower with a stellar credit will help you qualify and possibly get a lower rate only if you have a fairly good credit record yourself. Lenders will consider the lower of the two credit scores and if your score falls further behind, it won’t help in your application.
During a Refinance
You can refinance to add a co-borrower to the loan. Just like when applying for a new mortgage, you and your co-borrower go through the verification process anew, income, assets and liabilities and credit history be under review.
Adding a co-borrower to an existing mortgage through a refinance is different from adding him/her to the title deed of your house. Except when he/she is related to you by blood or a spouse, a mortgage co-borrower does not have a security interest in the property although he/she has to pay back the loan with you.
Without a Refinance
You can skip refinancing and add a co-borrower to the mortgage but only to a certain extent. For instance, you add someone to the mortgage to put into writing his/her promise to pay some or all of your mortgage debt.
If your purpose is to add a child, spouse or parent, you are better off adding them to the mortgage deed, as mentioned above. They can be co-owners but not co-borrowers so they won’t have to be held equally responsible for repaying the loan.
Otherwise, you still need to refinance so you can add a co-borrower on top of getting a low rate, taking cash out of your home, shorten or extend your loan term, etc.
Be sure to ask your lender about the implications of getting a co-borrower and the options to remove him/her should there be a falling out as in the case of divorce.