Should You Add a Co-Borrower to Your Mortgage?

If you’re buying a property with a spouse or partner who’ll share ownership of the home, you can put both your names on the mortgage loan and apply as co-borrowers. But while this is an option, it’s not required. It’s also possible for two people to share ownership of a property, yet only one person applies for the mortgage.

So, if you’re deciding to buy a home with someone, ask yourself these questions to decide whether to become co-borrowers on the loan.

How’s Your Credit History?

When deciding whether to include or exclude someone from a mortgage loan, take into account their credit health (and yours).

The good news is that you don’t need perfect credit to get a mortgage. Depending on the mortgage loan, you might get approved with a credit score as low as 580 to 620*.

But although you might qualify, having a low credit score can result in a higher mortgage rate. This can also drive up your monthly payments and reduce your purchasing power. So, if you’re buying a home with a spouse or another person, take a look at both of your credit scores to determine how you should apply for the mortgage.

If you both have excellent credit, putting both of your names on the mortgage application will likely result in a favorable interest rate. But if one of you has an excellent credit score and the other has a bad credit score, your lender may use the lower of the two credit scores to determine the mortgage rate.

How Much Do You Earn?

Of course, if someone applies for a mortgage without a co-borrower, the lender uses their income alone to determine the size of the mortgage.

The benefit of applying for a mortgage with a co-borrower is that lenders use your combined income for qualifying purposes. Let’s say Applicant A earns $45,000 a year and Applicant B earns $50,000 a year. That’s a combined income of $95,000 a year, which can greatly increase buying power. Typically, mortgage payments should be roughly 30 percent of income, so by combining their incomes, these applicants could likely afford a payment up to approximately $2,375 (including principal, interest, taxes, homeowner’s insurance, mortgage insurance, etc).

Now let’s say that Applicant A as a low credit score. If Applicant B applies for the mortgage loan on their own, the most they could spend on a mortgage payment would be considerably less, dropping to around $1,250 a month based on the 30% rule described above.

Keep in mind, too, that a solo mortgage loan applicant could potentially run into problems if they have a lot of debt in addition to their mortgage payment. Lenders take into consideration a borrower’s debt-to-income ratio (DTI), which is the percent of their monthly gross income spent on monthly debt payments. Ideally, DTI (including the mortgage payment) should not exceed 36% to 43% depending on the mortgage program.

If you have a high DTI, one benefit of adding a co-borrower to the mortgage is that their additional income can result in a lower overall DTI (as long as your co-borrower doesn’t have excessive debt too).

If neither borrower is in a position to apply for the mortgage solo, and one has a low credit score, accepting the higher rate might be the only option. The good news is that there’s always the option of refinancing to a lower rate in the future, once credit scores improve.

Final Word

Let the loan experts at Blue Spot Home Loans help you find the right mortgage solution for your situation. Whether you’re buying or refinancing, call today to get a rate quote or fill out the contact form.

Disclaimers….

*Certain limitations may apply to loan products for borrowers with a previous bankruptcy, foreclosure or short-sale and a higher interest rate and/or higher fees may be required.