CO-BORROWERS . . . SOME THINGS TO
More first time buyers are requiring the assistance of co-borrowers to
enable them to proceed with a home purchase. Here are a few items to know about
There are no special restrictions and/or requirements when the
co-borrower(s) intend to occupy the subject property. A non-occupying
co-borrower, however, must meet certain requirements.
Usually this category of co-borrower is used to strengthen the occupant
borrower's qualifications. Generally, the non-occupant co-borrower would
exhibit good cash reserves as well as financial strength, in the event it
should ever become necessary to assist with mortgage payments.
Most frequently, this type of co-borrower is a parent or relative of the
borrower. If the co-borrower is not a "blood relation", a long
standing personal relationship must be established and verified.
Qualifying ratios for the occupant borrower(s) varies depending upon the
type of loan acquired. FHA allows an immediate family member to co-borrow and
there are no requirements for the occupant borrower to qualify in any way
"individually". In conventional financing, the occupant's qualifying
ratios should typically not exceed 35/43 (35% for housing expense and 43% for
overall debt ratio). Strong compensating factors for the occupant borrower will
allow some stretching of these ratios.
USDA loans require all borrowers to be occupants as does VA financing. VA
additionally requires any co-borrower to have VA eligibility.
There are several considerations regarding payments and liability when using
a co-borrower to acquire a loan. Often, the occupant borrower's housing/rent
payment will increase with the new mortgage payment...a large increase is known
as "payment shock". Even though the borrower qualifies via the added
financial strength of the co-borrower, the entire monthly mortgage payment is
usually expected to be made by the occupant borrower. A borrower might answer a
simple question to determine if it is wise to proceed...while making the
smaller rent payment were you able to save monthly the amount by which your new
payment will increase? If not, how do you intend to make the higher payment
without undue hardship? It is easy to get caught up with the emotion of owning
your own home and say "we can make those payments, if we only budget more
carefully". But, will there be enough savings via budgeting to make the
Often misunderstood is the co-borrower's legal liability for repayment of
the loan. The co-borrower can not escape responsibility for the mortgage debt
by merely relinquishing ownership (i.e., executing a quitclaim deed for his/her
ownership interest). If the borrower does not make payments, the lender can
seek payment from the co-borrower. Any late payments, delinquencies and/or
foreclosures will most likely blemish both the borrower's and co-borrower's
credit rating. The only way to be relieved of loan liability is for the
borrower to refinance and remove the co-borrower from the loan.
It is advised that all parties to the proposed transaction meet with the
lender to discuss all aspects of the co-borrowing process. Pre-approval
consultations are FREE and easy to schedule. Call Humboldt Home Loans today.