Mortgage Co-Borrower Versus Co-Signer – The Truth About Mortgages

Today we will be discussing the major differences between a mortgage co-borrower and a mortgage co-signer.

While the two phrases sound very similar, and are sometimes used interchangeably, there are important differences that you should be aware of.

In either case, the presence of an additional borrower or co-signer is likely to help you qualify for the home loan more easily.

Instead of relying on your income, assets and credit alone, you can seek help from your spouse or a family member.

This may allow you to qualify for a larger loan amount, get a lower interest rate, or even win a bidding war through a stronger offer.

What is a mortgage co-borrower?

A mortgage co-borrower is a person who applies for a home loan along with the principal borrower.

Typically, this will be a spouse who will also reside in the subject property. For this, they share financial responsibility and ownership, and are both listed on the title.

For example, a married couple may decide to buy a house. They apply together as co-borrowers.

By doing this they can piece together their income, assets and credit history. Ideally, this makes them collectively stronger in the eyes of the lender and home seller.

It can mean the difference between an approved or denied LoA application and even a winning versus losing bid on a property.

Just imagine a home seller who is deciding between two competing bids with his real estate agent.

Do they go with the borrower only financially, or the married couple with two good jobs, two steady incomes, solid accumulated assets, deep credit history etc.

If we talk about that income then two income may allow you to house more,

What is a mortgage co-signer?

A mortgage co-signer is a person who acts as a guarantor on a home loan and assumes the responsibility of paying it back if the borrower fails to do so.

in that sense, Co-signer acts as a safety net of sortsand not an active participant.

This means that they do not make monthly payments and neither do they reside in the property concerned.

Perhaps more importantly, they do not have an ownership interest in the property. However, they share the liability with the borrower(s).

To be blunt, they get all the possible bad without any good i.e. ownership.

But the whole point of a co-signer is to help someone else, so it’s not about them. A common example is a parent co-signing to help a child. buy a house,

Both their income and credit history can be used to help their child get approved for a mortgage,

For the record, someone with an ownership interest in the property cannot be a co-signer. This includes a home seller, real estate agent or home builder. This would be a conflict of interest.

mortgage co-borrower vs mortgage co-signer

mortgage co-borrower vs co-signer

What is the credit score impact for co-borrowers and co-signers?

As a co-signer, you are responsible for the loan for the entire term or until it is paid off through refinancing or sale.

This means it will be on your credit report and any negative activity related to the mortgage (late payments, foreclosure) will be passed on to you.

there are also credit inquiryAlthough these usually have minimal effect.

However, it’s possible that timely mortgage payments can help you build credit over time. experian,

The other issue is that if you’re on the hook for a loan it can limit your ability to borrow, even if you don’t pay it back.

Its presence can make it more difficult to secure your own loan or your new lines of credit, including your own mortgage if desired. dti constraints,

If you are a co-borrower on a mortgage, the credit impact will be the same as if you were a single borrower. A credit inquiry will be done when applying for a mortgage.

And the loan will go on your credit report if/when approved, and payment history will be reported over time.

On-time payments can raise your score, while missed payments can lower your score.

What about non-resident co-borrower?

You can also find the term “non-resident co-borrower”, which as the name suggests is a person on the loan who does not occupy the property.

On top of that, this person may or may not have an ownership interest in the subject property. fannie mae,

This differs from a co-signer, who does not have an ownership interest as shown on the title.

But both must sign the mortgage or deed of trust, and there will be joint liability with the borrower.

On an FHA loan, there is a non-occupant co-borrower Is allowed unless they are members of a household with a principal residence in the United States.

If not a family member, or for 2-4 unit properties, 25% down payment required (Max 75% LTV,

Either way, the non-resident co-borrower takes title to the property, unlike the co-signer, who does not.

Note that co-signer or non-resident co-borrower not allowed on USDA loan.

And for VA loans, a co-signer must be a spouse or active duty/veteran who lives at the property.

Most lenders do not allow non-occupier co-borrowers on VA loans, although “joint loans” can be an option,

When not to use a co-borrower for a mortgage

Believe it or not, sometimes using a co-borrower can do more harm than good.

The most common example is when the potential co-borrower has poor credit or even marginal credit.

Because mortgage lenders generally consider the credit scores of all borrowers and then take the lower of the two mid-scoresYou don’t want to hook up with someone with questionable credit (unless you absolutely have to).

For example, let’s say you have a 780 FICO score and your spouse has a 680 FICO score. You plan to apply jointly because they are your spouse.

But then you find out that the mortgage lender will qualify you on a 680 score. he pushes you mortgage rate way up.

In this case, you may not want to use a co-borrower unless you need them for income purposes.

They can still be on title and have ownership in the property without the loan.

How a co-borrower’s high credit score can make you eligible for a mortgage

average credit score

Recently, Fannie Mae installed A new way of determining eligibility if there is a co-borrower.

They take each borrower’s average score and add them up, then divide by two (the average).

For example, imagine Borrower 1 has scores of 600, 616, and 635. They usually use the 616 score and tell the borrower that it is not high enough for financing.

Now let’s say there is a co-borrower (Borrower 2) with FICO scores of 760, 770, and 780.

Fannie Mae will now add the two average scores (770+616) and divide by two. This would result in an average average credit score of 693.

This Borrower 1 meets Fannie/Freddie’s minimum 620 credit score requirement (for conforming loan,

Note that this is only for qualifying, and only if there is a co-borrower. And it doesn’t apply to RefiNow loans or manually underwritten loans.

In addition, pricing (and mortgage insurance if applicable) is still determined by the representative credit score (616).

So with one you qualify, but the mortgage rate may be faster based on the low credit score used for pricing.

Note that regardless of these guidelines, not all lenders may allow a borrower with a credit score lower than 620 (lender overlay,

How to remove a mortgage co-borrower or co-signer

Although the mortgage may be good for the co-borrower or co-signer early on, they may want to opt out at some point.

There are many reasons to potentially free up your own credit, possibly a divorce.

Fortunately, this can be done relatively easily through a traditional mortgage refinance,

The caveat is that you’ll need to qualify for a new home loan without them. Additionally, you wish to have to have the mortgage rates favorable at that time as well.

After all, you wouldn’t want to trade in a lower-rate mortgage for a higher-rate mortgage just to remove a borrower or co-signer.

A common scenario could be a young home buyer who initially needed financial assistance, but is now flying solo.

They can refinance and reduce the potential stress/financial burden of the co-signer and eventually stand on their own.

Alternatives to using a co-borrower/co-signer

If you can’t find a co-borrower or co-signer willing to go on the loan with you, there may be options.

First, determine what the problem is, whether it’s a low credit score, limited income, or lack of assets.

Those with low credit score may consider improving their score before applying. In addition to making it easier to get approved, you may qualify for a much lower interest rate.

People who have low income/assets can look at options that require low or no down payment.

For example, both VA loan And usda loan No down payment required.

there also Fannie Mae HomeReady and Freddie Mac Home PossibleBoth require just a 3% reduction and allow boarder income (roommate) to qualify.

Or inquire about grants and down payment assistance through a local lender or state housing agency.

There are many mortgages that require little to nothing in terms of assets/reserves.

If these problems persist, you may even consider lowering your maximum purchase price.

using another option gift fund To lower your LTV ratio and loan amount, which makes it easier to qualify for a mortgage.

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