What is a co-borrower? A beginner's guide

Qualifying for a mortgage on your own can be tough. Applying with a co-borrower can strengthen your application and increase your odds of approval. Learn more about what a co-borrower is, how the process works, how different loan types treat co-borrowers, and the pros and cons of applying for a mortgage with a co-borrower.

Co-borrower meaning

A co-borrower applies for a home loan with you and shares responsibility for repaying it. If you were, for some reason, unable to make your payments, your co-borrower would be responsible for paying them.

Generally, co-borrowers share the house title. The most common example of a co-borrower is a married couple that buys a home together. Both are responsible for paying the loan, and both have full access to and use of the property.

It is possible to have a co-borrower who's not on the title. In that case, the co-borrower would be responsible for the loan but not have the legal right to use the property.

This commonly occurs when one partner in a married couple has credit problems, making them more likely to qualify for a loan if the partner with stronger credit applies alone.

Most home buyers choose to apply for a mortgage with a co-borrower because they need help qualifying. They may also qualify for a larger loan that would allow them to afford a more expensive house.

Other common scenarios in which people apply for a mortgage with a co-borrower include parents applying as co-borrowers to help their children afford a home, buying a house with a friend, or people buying a property as a business investment.

How does the co-borrower process work?

Applying for a mortgage with a co-borrower is very similar to applying for one on your own. The main difference is that both co-borrowers' financial profiles will be reviewed.

Here’s how it typically works:

1. Save for a down payment and closing costs. Both you and your co-borrower may contribute to the down payment, closing costs, and reserves. Lenders will verify the source of this money. Closing costs usually total 3% – 6% of the loan amount.
2. Submit a joint application. The borrower and co-borrower complete the mortgage application. You and your co-borrower will provide proof of income, employment history, and financial details.
3. Lenders check income and assets. Your lender will review both applicants' financials together.
4. Review credit profiles. Your lender will review both applicants' credit. In most cases, lenders use the lower of the two applicants' median credit scores, as reported by the three major credit bureaus: Equifax^®, Experian^®, and TransUnion^®.
5. Special rules for conventional loans. Lenders may average the median credit scores of both applicants with some conventional loans. That means your qualifying score may be higher if you recruit a co-borrower with good credit, which can boost your chances of approval.
6. Assess your combined DTI. Combining incomes often improves the debt-to-income ratio (DTI) for your application, which is one of the most important factors used to determine how much home you can afford. If you apply for a mortgage with someone with good income and low debt, their income and credit report can help you qualify for a lower mortgage interest rate and better loan terms.
7. Underwriting and approval. Finally, the lender will review your and your co-borrower's overall financial picture in underwriting, then make a final decision.

Qualifying as a co-borrower

When you bring in a co-borrower, you're combining your financial strengths. This can improve your approval chances, but it also means both parties must meet lender requirements.

Here’s what you’ll typically need to qualify as a loan co-borrower:

• A solid credit score. You should shoot for a credit score of 620 or higher for conventional loans, though there is no specific minimum. Rocket Mortgage offers FHA loans to borrowers with a credit score of at least 580. Other lenders may offer FHA loans to applicants with a credit score between 500 and 579 with 10% down. And for any loan type, a higher score typically lifts your approval odds and lowers your interest rate.
• Stable income. Lenders will want to see consistent, verifiable income. They want to ensure the borrower and co-borrower can afford the monthly mortgage payments.
• Manageable debt levels. A lower DTI improves your application. Your total DTI should be less than 43%. However, some loan programs allow higher.
• Proof of assets. You'll need to provide bank statements and other documentation. This is so lenders can verify funds for the down payment and reserves.
• Willingness to share liability. This is important. As a co-borrower, you are equally and fully responsible for the loan.

Co-borrower rules for different loan types

Not all loan programs treat co-borrowers the same way.

• FHA loans often allow nonoccupying co-borrowers. This means the co-borrower doesn't have to live in the home. A good example of when this would apply is with parents helping their children buy a home.
• Conventional loan rules can be stricter. Income and documentation requirements are usually more rigorous. Lenders may average the median credit scores of the borrower and co-borrower, which can benefit applicants with mixed credit profiles.

Whatever the loan type, however, a co-borrower can strengthen the application if they bring strong financial credentials to the deal. For this reason, choosing a solid co-borrower is essential.

Co-borrower vs. co-signer: What’s the difference?

The main difference between a co-signer and a co-borrower is that a co-signer has no ownership of the property. The co-signer typically won't move into the home or use it the same way the primary borrower can. However, both the primary borrower and the co-signer are responsible for the loan. If the primary borrower can’t repay the loan, the mortgage co-signer will be on the hook to cover any missed payments or repay the loan.

Pros and cons of using a co-borrower

Being in a co-borrowing situation has advantages and disadvantages.

Pros

• You may qualify for better loan options. A co-borrower may help you qualify for a loan with better terms.
• You may qualify for a higher loan amount. A co-borrower brings income to your mortgage application, which often reduces DTI. That can help you afford a larger mortgage.

Cons

• Missed payments can damage a co-borrower’s credit. You should feel confident that you and your co-borrower can afford your respective shares of the monthly mortgage payments. If you or your co-borrower experiences a loss of income, the other borrower will be responsible for covering the entire monthly mortgage payment.
• You’re in it for the long haul. Since you and your co-borrower typically share responsibility for the mortgage repayment, a split may create legal issues. Take your time to determine whether you want to share this responsibility with your co-borrower for the long haul.

The bottom line: A co-borrower can unlock loan approval

If qualifying for a mortgage by yourself is going to be a challenge, a co-borrower can strengthen your application. However, a co-borrower is equally and fully responsible for the monthly payments, even if they are not on the title of the home. Before signing on as a co-borrower, make sure you trust your partner with the loan.

For those ready to take the next step, apply for a mortgage today with Rocket Mortgage.