THE INS AND OUTS OF CO-BORROWING WHEN BUYING A HOME
Being aware of the ins and outs of co-borrowing as a tool in facilitating home sales can help grow your business. For your buyers who may be deficient in income and/or credit history, inviting a co-borrower to invest in the purchase and help in qualifying for the mortgage can be the solution to making a sale happen. Co-borrowers are not always spouses but can be friends or relatives.
There are two kinds of co-borrowers. The occupant co-borrower lives in the home and shares the responsibility and benefits of homeownership. The non-occupant co-borrower or a co-signer would not typically make payments but is liable for the loan if the other co-borrower fails to make payments.
With a financially strong co-borrower on board to help facilitate a home purchase, the weaker co-borrower can work on building up their credit. Eventually, they may be able to refinance, buy the other party out with earned equity, and take over sole ownership. As home prices continue to rise, equity positions grow as well.
Teaming up with a co-borrower allows your prospective buyer to buy a home sooner and will boost their home-buying budget. Pooling each borrower’s reserves enables a bigger down payment, resulting in better loan terms. Coming up with at least 20% down will remove the mortgage insurance burden.
Lenders will evaluate the debts and incomes of both borrowers to determine how much they will loan for a purchase. One co-borrower may have a debt-to-income (DTI) ratio of less than the usual maximum of 43%, while the other co-borrower could have a ratio that is higher than 43%. The stronger borrower should weigh the risks of purchasing with a co-borrower with a lot of debt.
No matter how big the down payment, co-borrowing gives buyers the opportunity to get a bigger and better home than if they were to try and go it alone. Alternatively, buying a more modest home than what they are qualified for means a smaller mortgage obligation and more disposable income for the borrowers.
One drawback to an attempted co-borrowing purchase is that lenders will not qualify a prospective co-borrower with bad credit who may want to “piggyback” on the borrower with better credit. Ideally, your buyer would want to co-borrow with someone with a similar credit standing, DTI and down payment funds. If the situation is financially lopsided, there can be a legal agreement that spells out different percentages of ownership interest.
At some point, the co-borrowing arrangement could stop being mutually beneficial, so there should be an exit strategy in place. There should be a legally enforceable agreement that addresses liability if either party wants to move on.
One of the most important points about mortgage co-borrowing is that each borrower is jointly and severally liable for the loan. No matter what agreements exist between the co-borrowers, all the lender is concerned about is that the payments are made on time.
Please call GenNEXT Funding to make an appointment for any buyer who needs help qualifying for a loan. Co-borrowing may be their path to homeownership. Phone 800.773.6531 | Email [email protected]