If you don't have enough income to make monthly payments on a mortgage loan on your own, you can take out a loan with a co-borrower who will share the responsibility. Co-borrowers are often spouses who want to buy a house neither of them could afford based on one income. When calculating how big a mortgage you can afford, the mortgage lender will combine your income and the co-borrower's and consider both your credit scores.
Co-Borrower Is on the Hook for Repaying the Loan
If someone puts his name on your mortgage as a co-borrower, he makes himself legally liable along with you if the mortgage goes into default. The lender can go after either borrower to get the money if there's a default. This is different from guaranteeing a loan because guarantors aren't liable until after the lender tries and fails to get money from the borrower.
Combined Incomes Improve Ability to Borrow
The lending industry standard is that your monthly housing costs, including property taxes, mortgage payment and insurance, should be no more than 28 percent of your pretax income. Your mortgage plus other debts such as student loans should be a maximum 36 percent. Some home loans, such as those insured by the Federal Housing Administration, allow higher percentages. When you have a co-borrower, the lender will combine both your incomes as the basis for those percentages, which means you can qualify for a more expensive home.
Lender Will Consider the Lowest Credit Score
In addition to considered both incomes, the lender will review both credit histories. Your credit histories and credit scores determine how good the terms of your mortgage will be. If you have excellent credit but your co-borrower doesn't, the lender will use his credit when setting the interest rate. Check both your credit reports before applying for a mortgage and look for potential problems.
Co-Borrower Doesn't Have to Live in the Home
While a spouse or life partner often takes out the loan with you, a co-borrower can also be someone who doesn't live in the house with you. If you're applying for an FHA-insured mortgage, for instance, your co-borrower could be one of your parents. This enables someone just starting out with minimal income to qualify for a mortgage.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.