Co-Borrower
“Neither a borrower nor a lender be,” Shakespeare opines in Hamlet. This may sometimes hold true for a co-borrower as well. Perhaps you are tired of paying rent and want to buy your first home, but haven’t been able to qualify for a mortgage loan. So, even though you’ve tapped out your parents (who paid for your college tuition, your first car and all your food for the first 18-25 years of your life), you ask them to be your co-borrower on the loan application.
A co-borrower is any additional person whose income and credit score will be considered in order to qualify for any type of loan. Their name will appear on all the loan documents as well as on the deed to the property, and they will be liable for repaying the loan should the other borrower decide to quit paying. Most of the time a co-borrower is a spouse, but it could also be a friend or relative who does not intend to live on the property. If you think you need a co-borrower because your credit score is low, unfortunately lenders use the lower score when making their decision. But another income on the loan application certainly helps, if your debt to income ratio is too low. This ratio is calculated by adding up all your monthly debts and dividing them by your gross monthly income. Debts should not be more than 35% of your income for a mortgage loan.
There is some risk to the co-borrower. Even if the borrower makes all mortgage payments on time, the co-borrower’s credit score could be impacted, making it harder to qualify for a car or other loan because now their debt to income ratio is higher. A good alternative is to refinance the loan as soon as the borrower can qualify on his or her own. With FHA loans, you can refinance in as little as 210 days with a streamline refinance. There will be no credit check and it requires little documentation. So, hopefully the borrower will get that second job soon...
Related or Semi-related Video
Finance: What is a Co-signer?7 Views
Finance a la shmoop what is a cosigner? well it's just this oh wait
that goes in the trigonometry video people why don't you do this all right [Man discussing trigonometry]
never mind cosigner it's this... okay all right we're in finance so a cosigner is
this there we go it's your mom you really wanted that
condo with the nice view of the park the cool arts district and the local dentist [Dentist office building]
office nearby for some weird reason but the building owners just didn't trust
you alone to make the payments yourself which makes sense given that you're a
part-time barista who takes at least one sick day every week you blame them so [Sick days marked on calendar]
your condo dream seems a well a bit out of reach luckily for you the bomb
or Bank of mom came in handy when she co-signed the loan along with you all [Mum signing loan agreement]
right what does that co-signing mean well it means that you are the first one
obliged to pay the monthly payments on your loan but if you don't well then the
Bank of America way bigger than the bank of mom can come after mom and she is
directly legally obligated to pay the loans that you promised - hey so yeah
you got your condo dream but mom's living quarters aren't so spacious yeah [Mum laying in a car backseat]
well you made her co-sign for your deadbeat self hanging her butt up to dry
and now she's well enjoying the view from her SUV parked on the curb of the [SUV window winds down and Mum appears]
road outside the dentist hang in there mom you'll get a better
parking lot slot with a view someday
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