When you’re looking to buy a new house, you’re probably hoping for the loan process to be over with before someone else bids higher on the one you really want. Keep in mind that several factors determine whether your home loan gets approved or not, such as income, personal credibility, bankable assets, and much more.
However, finding a home with a co-borrower can dramatically increase the chances of getting your mortgage approved. When realtors work with buyers that aren’t very experienced in the field of real estate, they do recommend getting a co-borrower to make the process of home loan approval smoother. At Cher, we help you get matched to a co-borrower, loan options, and home. Here’s our guide to co-borrowing.
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Who is a Co-Borrower? What are the Rules of Co-Borrowing?
A co-borrower is someone who shares financial responsibility with another borrower and agrees to pay back their share of a home loan within the given time frame. Co-borrowers decide to do this to make sure their home loans gets approved, and also to obtain tax benefits associated with co-borrowing.
Co-borrowers are usually relatives or close friends of the loan borrower. If you decide to opt for family members, this includes spouses, parents, and siblings. But given the challenge of discussing finances and living situation with those who are close to you and the rise of smarter technology, co-borrowing with other people is becoming more common. You can meet verified borrower through Cher to avoid losing friends over the home buying process.
Who Can Co-Own?
Fathers and sons can co-borrow; however, if a father has more assets than his son (which is usually the case), then the father would need to be the owner of the property. If a father and his unmarried daughter co-borrow, the daughter will have to be the owner in order to keep post-marriage disputes at bay. In case two brothers are living together and intend on continuing to live together, they can apply for co-borrowing as well.
A mother and daughter can co-apply for a loan, but the income of the mother does not determine the loan eligibility, and the daughter needs to be the property owner. In case both the borrowers get into some form of dispute in the future and want to end the agreement with the lender, they are both equally liable to face the legal consequences. However, it depends on the bank or financial institution that issued the loan; they can begin the recovery proceedings against all the co-borrowers in this regard.
As you can see, co-owning with family members is often a complicated process. That’s why it’s often simpler and wiser to get matched with like-minded co-owners outside of your regular circles.
You can check out Cher to find verified co-owners in our network.
How is a Co-Borrower’s Credit Calculated?
As far as credit is concerned, a lender is required to take into consideration the lowest credit score between the two applicants to determine the eligibility requirements and the underwriting of the loan. This means that if the credit score of one of the borrowers is lower than the lender’s criteria, then you won’t get your loan approved - regardless of how high the credit score of the other co-borrower is.
This also means that the lower credit score will be used to decipher how low the rates are. Therefore, in case the credit score of the person you’re trying to appoint as your co-borrower is much lower than yours, and you don’t particularly need their share of additional income to get approval for your loan, then it’s best to not add them to the mortgage situation.
If one of the borrower’s credit score is low, then the other borrower’s credit score is vital if you want to get that loan. This often happens among those who are buying a home for the first time. When lenders are deciding if a home loan should be approved or not, a positive credit score from one of the two co-borrowers always helps in giving it a positive push.
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How Adding a Co-Borrower Helps
Co-borrowing helps in increasing the loan approval eligibility of the borrower. For example, if your income lets you take a loan of $100,000, but your loan requirement is $200,000, then your co-borrower can stretch their eligibility for you to get your loan approved.
Whenever co-borrowers are involved in getting a loan, the repayment capabilities of everyone involved are considered to determine the loan eligibility. Therefore, in case one applicant is falling short due to some reason in fulfilling the loan eligibility criteria, a co-borrower can help with his/her ability to fill the requirements of the loan. In the same way, in case the credit score of one person is lower than what the bank requires, the credit score of the co-borrower can aid in getting that loan approved.
A co-borrower helps in improving your debt-to-income ratio (DTI). Your DTI refers to your monthly debt payments divided by your gross monthly income. When you have a high DTI, that can often serve as a reason for your loan application getting rejected. However, if you have a co-borrower, the debt and income of your co-borrower and you can be combined to reach a low DTI that meets the loan eligibility criteria. Therefore, having a co-borrower with a higher salary and a lower debt rate can make your combined DTI rate smaller, thereby aiding in getting you that home loan.
Under Section 80(C) for payment of the principal and payment of interest under Section 24, when a home loan is co-borrowed, each borrower is eligible to obtain tax benefits. Depending on the mentioned share of each of the applicants in the loan agreement, the portions of tax benefits are distributed accordingly. The applicants are allowed to reap the tax benefits only after the buyer has possession of the property.
You can check out Cher for assistance to help you become a homeowner.
Teaming up with a co-borrower can increase your chance of getting a loan for the house. A co-borrower can be a family member, but keep in mind that there are some restrictions. However, if you are having trouble obtaining a borrower, then using Cher can match you with the perfect co-borrower to make your dreams come true. Cher can also offer additional services that can get you closer to becoming a homeowner.
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