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Buying a house with low income or poor credit? Consider a co-borrower

Erik J. Martin
The Mortgage Reports contributor

Co-borrowers can make mortgage issues disappear

It can be tough to buy a house. Modest income, low credit scores, and high home prices can all stand in the way.

But if you find a co-borrower, those issues might suddenly disappear.

A co-borrower applies for the loan with you, so you can qualify based on their higher credit score or bigger income.

But that person is also on the hook if you can’t make your mortgage payments. So be sure to check your own financing options first.

Many loans have low or no down payment and flexible credit requirements.

You might be more qualified to buy a house right now than you think.

Check your home buying eligibility today (Mar 28th, 2020)
What is a co-borrower?

A co-borrower is someone who takes out a mortgage loan with you to help you afford the home. A co-borrower might help you qualify for the loan, by adding a stronger credit score or bigger income. Or, they might help you with funds for a down payment. A co-borrower does not have to live in the house with you.

What’s the difference between a co-borrower and a co-signer?

Like a co-borrower, a co-signer is legally obligated to repay the loan if you cannot. But a co-signer is not expected to make any loan payments. They serve as a guarantor on the loan without any ownership of the property. And unlike an occupant co-borrower, a co-signer will not live in the property. This is why many end up cosigning a mortgage with parents.

If you only need help to qualify for a loan and can afford the mortgage payments yourself, finding a co-signer is probably your best bet. But if you need help in making mortgage payments and are willing to share ownership (and equity) of the home, you’ll need a co-borrower.

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Two types of co-borrowers

Rick Scherer, CEO of OnTo Mortgage, says there are two types of co-borrowers.

An occupant co-borrower is someone who will purchase the home with you and live in the property as a primary residence.

A non-occupant co-borrower will not live in the property but will assist you in qualifying and paying for the property,” he says.

Bruce Ailion, Realtor and attorney, adds that a co-borrower “becomes jointly and severally liable for the debt on the loan. If you as a borrower are not able to pay back the loan, the co-borrower will be called upon to pay this debt.”

Marvin Smith with DKR Group LLC is the author of “The Psychology of Credit.” He says the co-borrower’s name appears on your loan’s documents and the property’s title.

“This person’s income and credit history are used to help you qualify for the loan,” Smith says.

When a first-time home buyer might need a co-borrower

There are many scenarios today where co-borrowing can make sense.

  • Young buyers in expensive cities
  • First-time home buyers with lots of student debt
  • Retirees with little income flow
  • Self-employed people without tax returns

For example, maybe you are a young worker who wants to live in a big city where home prices are too high.

Or you recently graduated from college with large student debt; now you need help qualifying for a mortgage.

On the other hand, say you are a retired parent with little to no income. Getting your adult child to be a co-borrower can help you downsize or purchase another home.

“All of these people make great candidates for seeking a non-occupant co-borrower,” Scherer says.

“Another scenario we sometimes see is a college student lacking income whose parents want him to live in a home they will co-own.”

Or, say you’re self-employed. It can be hard to demonstrate sufficient income to a lender.

“But if a family member jumped onto the application with you, it could help you qualify,” adds Scherer.

Good co-borrower candidates for a first-time home buyer

Ailion says most co-borrower situations involve family members and personal relationships.

“It increasingly takes more than one income to qualify for a home today. That’s where relatives can help,” explains Ailion.

“It takes increasingly more than one income to qualify for a home today. That’s where relatives can help.” –Bruse Ailion, Realtor and attorney

But in some situations, folks who aren’t related to you can make good co-borrowers, too.

“This often happens in an investment setting,” Ailion says.

“A person with poor credit may find a great home to flip but lack the money or credit to buy that home. So they may secure an investor — someone they’ve never met before — to put up the money and credit in exchange for a share of the profit when the property sells.”

Scherer suggests that the ideal prospect is someone with great income, low debt, and a good credit score.

The ideal co-borrower is someone with great income, low debt, and a good credit score (at least above 740).

“You want to ask someone who has enough income that washes away their own expenses and still has plenty of money left over to prop up your side of the balance sheet,” says Scherer.

“This person should not have a lot of debt. And he or she should have a higher credit score than you. Their score should at least be above 740.”

Your ultimate goal should be to get the co-borrower off the loan

Be prepared for questions from a co-borrower candidate you ask.

“Anyone looking to help you out will want to know your exit strategy and the plan to remove them from future liability,” says Scherer.

You’ll also want to talk about what happens when it’s time to sell the home.

If it’s a non-occupant co-borrower, how much equity should this person pocket, for example?

This is especially important if you’re buying an investment property with a co-borrower as a joint venture. You’ll want to solidify details about profit-sharing before anyone puts their name down on the loan.

Where to get a home loan with a co-borrower

Scherer says a non-occupying co-borrower loan is very common.

“It’s offered for conventional loans by both Fannie Mae and Freddie Mac,” notes Scherer. “And some other loan programs offer them, too, like an FHA loan. But certain restrictions apply.”

Ailion points out that virtually all lenders will permit occupying co-borrowers on a loan. And he says co-borrower mortgages are offered via portfolio loans from banks and credit unions, as well.

Alternative loan options for low credit or low income

Adam Spigelman is vice president at Planet Home Lending. He says that if you decide against using a co-borrower, there are other options that may allow you to count roommate or partner income toward your mortgage.

“One option is Fannie Mae’s HomeReady program,” says Spigelman. “This is a low down payment mortgage that lets you use boarder income for up to 30% of the income you need to qualify for the home loan.”

  • Fannie Mae HomeReady loan
  • As little as 3% down
  • Include a roommate’s income to qualify
  • Cover up to 100% of the down payment with gift funds

This could be a good solution for a couple with one partner who has credit issues and cannot qualify for a mortgage.

“It would also appeal to a recent graduate with student debt who doesn’t want to share ownership of the home but needs extra income to qualify,” suggests Spigelman.

Should you buy a home with a co-borrower?

Using a co-borrower might be the only way you can qualify for a home.

But co-borrower relationships can be tricky to navigate. And remember — that person is on the hook if you can’t make your mortgage payment.

So before looking for a co-borrower, see whether you qualify for one of the many first-time home buyer programs available.

Even with a sub-par credit score or modest income, affording a home might be easier than you think.

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