Looking to beef up your borrowing power? Barring a lottery win or a sudden inheritance from a wealthy great aunt, a joint loan could be your best bet for securing a loan with a higher dollar amount and a low interest rate. Here’s how.
What does it mean to be a co-borrower?
Also referred to as a co-applicant, a co-borrower is a person who shares identical responsibility with a fellow co-borrower. Each borrower seeking a joint loan has their credit looked at in the same way, evaluated by the same metrics a lender would use for any individual borrower. Since lenders are looking at two incomes and two credit reports rather than just one, the chances of getting that loan with the best possible terms are significantly higher. Often, the person with the better financial profile will be determinative in the loan’s terms.
If approved, the multiple borrowers have joint ownership of the loan, and the responsibility for the loan’s balance lies with them equally. Co-borrowers get to reap the benefits of an often more-sizable loan, while at the same time sharing identical liability for its repayment. Specifically, with co-borrowing on mortgages, each of the co-borrowers will have their names on the title of the property. It’s common for first-time homebuyers without long-established credit histories to be co-borrowers.
Are co-borrowers and co-signers the same thing?
No. Co-borrowers and co-signers are not identical. There is a similarity in that a lender will evaluate the income and the credit score of a co-signer in determining whether to approve the loan. But unlike a co-borrower, a co-signer isn’t usually the one who gets the benefit of the loan. In most cases, a co-signer is needed to help out a loan applicant who otherwise might not be able to get the loan on their own. And while a co-borrower immediately bears responsibility for payments on a joint loan, a co-signer only has to step in with payments if the principal borrower fails to make them.
Who can pair up for a joint loan?
When most people think of a joint loan, they picture two spouses joining their financial forces to get a mortgage for a home. And that pairing and scenario are common but by no means the only kinds of folks who can partner up on a loan. A business associate, a close friend, a family member, or any significant other with sound financials can be party to a joint loan. While in practice lenders may prefer related co-borrowers, lenders should treat married and unmarried co-applicants equally.
Do lenders like joint loans?
Yes. It’s easy to see why a lender would like to make a loan to co-borrowers: having two incomes responsible for repayment means a lower risk of missed payments or default. Joint loans not only boost the power of the borrowers with higher loan amounts at the best possible interest rates, the power of the lender to have that loan paid back also increases. Should one of the co-borrowers fall behind in payments, the lender has the right to require full repayment from both co-borrowers. And this failure to pay back the loan will show up on the credit reports of both co-borrowers — so choose your loan partner wisely!
When is and isn’t co-borrowing a good idea?
While almost any two people can be co-applicants, by far the most common pairings are two spouses looking to co-borrow for a mortgage and two business partners engaged in a joint business venture. In these cases, each co-borrower has a deeply vested interest in the reason for the loan, each enjoying the benefits equally, and so co-borrowing makes the most sense in these cases.
But co-borrowing isn’t always the best route. And this is especially the case if the two co-applicants aren’t in similar financial situations. If, for example, one of the co-borrowers has a significantly lower credit score, that could weigh heavily on the lender’s evaluation and could mean that the loan will have a higher interest rate. An individual application might yield better results. In other cases, where one borrower will get considerably more benefit from the loan, a co-signer makes more sense.
What are some of the pros and cons of co-borrowing?
On the plus side, two borrowers with strong credit scores stand a good chance of getting the best possible interest rate. And often with a higher loan amount than either person would be able to get on their own. Overall, a loan application with co-borrowers has a greater chance of getting approved, and the shared liability for that loan is something usually both parties are thankful for.
But as with any joint endeavor, the deal hinges on the notion that each co-borrower can meet their financial responsibilities. If one of the co-borrowers is on shakier financial ground than the other, that could weigh heavily on their fellow co-borrower. This could not only inflict damage on credit reports but also put considerable stress on personal relationships. Made substantially worse if, heaven forbid, there’s any loss of assets over one person’s failure to meet the loan’s requirements.
Can one co-borrower exit a mortgage loan?
Possible but not probable. While not common or simple, the terms of a loan can be altered to allow one of the co-borrowers to come off of a mortgage. This is most often the case if one of the co-borrowers is deceased, or that the loan has been fully paid. However, as lenders increase their risk in changing from two people bearing responsibility for a loan to just one, they are often reluctant to free a co-borrower from the responsibility they signed up for.
That said, it is possible. Some lenders allow this change with a fee and re-qualification of the remaining borrower to make sure they’re able to take on the full responsibility of the loan. Refinancing the mortgage might also present the opportunity to change the terms of the loan from dual borrowers to single-borrower status.
Whether it’s a close personal relationship or a financial associate, the decision to become co-applicants comes down to trust. If you have full confidence in your partner, co-borrowing may be the best way to turbo-charge your borrowing power.