So how do you know if you need a co-borrower?
If your credit is poor, it doesn’t help you to add a co-borrower with excellent credit. Lenders usually take the lower scoring borrower into account. So if you have a credit score of 600 and you ask your mother to be a co-borrower, because she has a score of 800, your low 600 score will be the one judged.
Co-borrowers can be helpful if you don’t have the income or assets needed to qualify for a loan. As long as your co-borrower has the credit score needed to qualify, their income and assets can be added to yours to get the loan amount you need to purchase the home.
Whoever is on the loan is responsible for the payment each month. If a payment is missed, both parties are penalized. However if the payments are on time each month, the credit reports of both borrowers will benefit.
If you and your spouse purchase a home together and apply for the loan together, you will both be on the mortgage contract. If you divorce later, it can be hard to take one person off of the loan, especially if the real estate market declines.
In the case of a divorce you have a few options:
• Sell the home and split the profits.
• Refinance the home, so that the person living in the home is solely responsible for the loan.
• Ask your bank to allow one party to assume the loan (rarely accepted).
• Maintain the current loan, keeping both parties responsible for the home.
The first two options are usually only available when the real estate market is improving. If property values go down, it is often hard to sell your home or refinance, unless you have a lot of equity.
Even if the home’s value is high enough to allow for a refinance, the party wishing to keep the home would need to qualify for the loan by themselves. This means that person must earn enough income on their own (and have the assets required). Of course they would need a good credit score as well.
In some rare instances, your lender may allow one of you to assume the loan releasing the other party. In this case you don’t need to go through the expense of a refinance. The lender will still want to make sure the person remaining on the mortgage loan can afford the payments each month. This is rarely accepted, but worth asking you lender about.
If you don’t have equity in your home, you will probably need to continue with the mortgage loan as is, working out an agreement with your ex-spouse. In this case, purchasing a new home will be difficult, because you would need to be able to comfortably support both mortgage loans.
When you are setting up the mortgage agreement, you should look at the long term consequences of getting a co-borrower.
Just in case you are looking for other instruments to buy when your credit score is low here are some alternatives to look into that may get you into your home....
Lease Option or Owner Financing
Happy Herald Realty is on the lookout to make buying possible for all our readers. We feature lease options and owner financing on properties that just may be the right fit for you.
Make no bones about it, banks do not make it easy even when you have great credit to borrow.
Don´t hesitate to give us a call to help locate a property for you.