It can pay to partner up
Many shoppers eager to buy a home have trouble getting from A to B. That’s often because they lack the funds for a down payment. Or they find it tricky to qualify for a loan.
Luckily, there’s an option that may ease the path to purchasing: get a co-borrower to go in on the deal with you. New research shows that more buyers are choosing this route.
Learn the facts about this approach and consider asking a parent, relative or friend to be a co-borrower. It can be a win-win situation for both parties that puts you on the fast track to owning.
What the research found
ATTOM Data Solutions defines co-borrowers as “multiple, non-married borrowers listed on the mortgage or deed of trust.”
The metros with the biggest share of co-borrowers were: San Jose (50.9 percent); Miami (45.2 percent); Seattle (39.1 percent); Los Angeles (31.1 percent); San Diego (29.4 percent); and Portland, Ore. (28.8 percent).
Should you co-sign on a mortgage?
Markets with the smallest share of co-borrowers were: Memphis (10.3 percent); Mesa, Ariz. (12.5 percent); Oklahoma City (14.2 percent); Gilbert, Ariz. (14.4 percent); and Henderson, Nev. (15.1 percent).
The benefits of a co-borrower
Getting a co-borrower to partner with you on a purchase helps on two fronts.
“First, the co-borrower’s income and credit history can help you as a buyer qualify for a loan that you would not qualify for on your own,” says Daren Blomquist, senior vice president for ATTOM Data Solutions.
The family mortgage: borrowing from loved ones instead of a bank
“Second, a co-borrower may also be able to assist with a down payment to help lower the monthly payments on the mortgage, making them more affordable. This is really helpful for first-time buyers in high-priced markets,” he says.
How it works
An unmarried co-borrower can either live in the home as a co-owner occupant or live elsewhere as an investor non-occupant. This often means a parent, sibling, relative or friend of the owner-occupant.
“They help with the down payment in exchange for a share of the equity gained in the home over time,” says Blomquist. They may or may not also contribute to the monthly mortgage payment.
VA home loan: buying a house with a non-veteran
Parents can be ideal co-borrowers. The deal helps their children build wealth through ownership. And it can be a way to keep those children—and possibly grandkids—close by.
“An unmarried co-borrower is really no different than a married co-borrower in terms of the financial obligations,” he says.
“But the lender commonly views them as an investor rather than an owner-occupant. That means the co-borrower is still on the hook for the mortgage. So that responsibility should not be taken lightly.”
Translation: if your mortgage is not paid and your property is foreclosed, your co-borrower will suffer the penalties of that foreclosure on their credit history and in the form of any investment loss.
How to set it up
A co-borrower arrangement works best if three main criteria are met, says Blomquist.
- The market is higher priced, with a good chance of long-term appreciation.
- All co-borrowers should agree to keep the home for at least five years.
- Each party’s exact expectations are put into writing. Also, write down what will happen if one party doesn’t fulfill those expectations.
Buying a home with a girlfriend, boyfriend, partner or friend
For best success, try these tips:
- Decide how the equity will be divvied up if and when the home is sold. Put it in writing. “When multiple buyers are on the deed, the default is that any equity is owned in equal shares by all the parties involved. But co-borrowers may want to adjust this in their agreement, depending on the amount invested by each party,” notes Blomquist.
- Aim for good exit strategies. “Ideally, the mortgage payment should be less than what the property could rent for. That way, if the owner-occupant has to leave the property, it can be rented with a positive cash flow,” he says.
- Make the down payment as big as you can afford. This provides more up-front equity in the property. And that comes in handy if the home needs to be refinanced or sold quickly.
- Treat this as a business agreement. “This avoids messy financial situations and hurt feelings down the road,” he adds.
Effect on the market
Ultimately, the recent increase in co-borrowers is good and bad news for the housing market.
The not-so-good news is that it proves there’s an affordability crunch.
“This crunch is forcing more first-time buyers and others to get help from co-borrowers to be able to qualify for a mortgage loan,” he says. “This indicates that these borrowers are stretching themselves financially. And that could spell trouble if there’s any external economic shock or even a disaster like the hurricanes we’ve seen in Texas and Florida.”
The good news is that lending standards remain less risky for owners and lenders alike. And that’s the reason why these buyers need help from co-borrowers.
Help friends or family qualify for a home with FHA's "family mortgage"
“Co-borrower purchases introduce additional risk to the housing market. But it is nowhere near the level of risk we saw with the stated income, no-doc type of loans during the last housing boom,” Blomquist adds.
Another good sign? The median down payment in the second quarter was 7.3 percent of the median sales price. That’s nearly a three-year high. That’s also more than three times higher than the median 2.1 percent down payment seen in the fourth quarter of 2006, “when riskier lending was taking hold in a misguided effort to extend the housing boom,” he notes.
What are today’s mortgage rates?
Whether you use a co-borrower or buy a home on your own, mortgage rates today remain extremely attractive and affordable. For the best deal, compare offers from several competing lenders and choose the best rate and terms.