What is Co-Borrower: What You Need to Know
Requirements for obtaining loans are sometimes unattainable. You might need a high credit score, a large income, or even collateral to be eligible. In a lot of scenarios, one borrower cannot manage to fulfill them all alone.
For that reason, certain lenders allow you to have a co-borrower on particular loans. A co borrower is someone who cosigns the loan with you and agrees to be included in the repayment. In case the collateral is required, that person is a part owner of the assets as well. In this article, we will discuss the most important aspects that you need to know.
What Is A Co-Borrower?
When you decide to get a loan, you are the primary borrower. If you do not have your own assets or you do not meet the required criteria, such as a high credit score, you might want to get a co-borrower. They will share the responsibilities of the loans with you and help you become eligible.
For example, if you and your spouse own a house, you need them to sign the mortgage loans with you. The names of both borrowers will be on the loan agreement, and you are equally liable.
They have to help with repayment, and their credit history is checked as well. Once you get a co-borrower, you have to understand that their income, assets, and credit score are just as important as yours with such loans.
How Does The Co-Borrower Process Work?
When someone agrees to get a loan with you, the application process is not much different than with regular loans. Both borrowers need to submit documentation showing their DTI, credit history, and so on. The lender will review your application based on the loans requirements and let you know if you are eligible.
The debt-to-income ratio on loans can be improved if you have a co-borrower with a good credit score and small or no debts. The lending company will consider everything and look for the average. That way, co-borrowing can certainly help out a lot if your DTI is not looking good. All these factors might affect the rates on loans as well.
When it comes to credit score, unfortunately, a lot of lenders will still consider the lowest one on the loans.
However, with Fannie Mae loans, the average credit score between the two borrowers is taken into account. Depending on your lending company of choice, the application for such loans can either be submitted online or at a physical location.
Who Is Co-Borrower Best For?
Getting someone to be equally responsible for taking out loans with you is not always easy. The best situation is when your spouse or a sibling is willing to be in this role and do the repayment with you. Your co-borrower must also be the part owner of your assets and generally have a good credit rating.
Having a co-borrower is best if you find yourself in one of these three instances:
- You want to purchase a home with a significant other, a friend, or a family member.
- The requirements on loans are too strict, and you cannot meet them on your own, so you have to look for other options.
- You are already in debt or have other loans, and your income is insufficient to cover everything. In this case, their DTI can be very useful, as well as their credit history.
Pros And Cons Of Using A Co-Borrower
Having a co-borrower can make the entire loan application process less stressful and help you long-term as well. If you have a bad credit score, it can boost your chances, bring more options, and even get you the best interest rates. If you own certain assets with someone, then it definitely makes sense to share the loan repayment with them as well.
Moreover, if you are considering being someone’s co-borrower, it is not necessarily a bad thing. Both borrowers will have equal rights and obligations in regard to repayment. To help you make the best decision and get some guidance on such loans, see below for lists of pros and cons of co-borrowing.
Pros Of Co-Borrower
- Various options available
When there are multiple borrowers, they will certainly get better opportunities on loans. If your credit history together is good, and you have a good DTI ratio, lenders will offer more options. You might even be able to compare lenders and pick the best one.
- Higher amounts
Borrowers with solid backgrounds and higher credit ratings may be able to take out larger loans. If you combine assets and income with someone, the number of options for loans will be much higher. The lenders will see you as a lower-risk customer that can make the repayment.
- Lower rates
Best credit scores and valuable assets bring low interest rates. When you have a co-borrower, you will likely have better chances of getting approval. If the borrowers have good qualifications together, many lenders will offer the best options regarding the rates on loans.
- Improving credit score
If your credit history is not that good, there is a way to fix that! Making a regular monthly payment and honouring the agreement can boost your credit score. This can definitely be useful for future loans and other financing options.
Cons Of Co-Borrower
- Long-term responsibility
Once you agree to be a co-borrower, you are in for the entire duration of the borrowing. If you took out a loan with your spouse and you are getting divorced, the repayment of such loans is still on both borrowers. You will both continue making the monthly payment regardless of your relations.
- Primary borrower might be irresponsible
If the primary borrower misses a payment, this can damage the co-borrowers credit score as well. If one of the borrowers cannot afford their share of the payment, the other one will have to pick up the slack. Otherwise, both borrowers will be held responsible.
- Potential social risks
Mixing loans and personal relationships can be challenging. If you take out a loan with your friend or a partner, it can lead to arguments. Even though you might have the best bond with someone, make sure that both of you are going to handle your obligations in such loans responsibly.
What To Consider Before Getting Co-Borrower
Co-borrowing can be the best idea sometimes, but it is not always necessary, as there are other options. Before getting such loans, there are many questions you need to ask yourself. Can you meet the loan requirements on your own and become eligible for different loans? What does the other person bring to the table? Do they help with lower interest rates?
On the other hand, if you are in a position of being the secondary borrower on loans, you might want to think twice before you agree. Consider all the ways this might be useful.
However, also evaluate in which ways this might not have the best impact on you. Make sure your credit score is not damaged due to someone else’s missed payment.
Here are some of the main factors you need to consider:
- Check if the lender offers joint loans.
- Look into the requirements, such as credit history, and whether you meet them.
- Determine your debt-to-income ratio.
- Potential tensions in the relationship.
- Amounts for loans with and without a co-borrower.
- Interest rates during repayment of the loans.
Co-Borrower Vs. Co-Signer
A co-borrower has half ownership of the primary borrower’s assets. They share rights and obligations equally. Both are responsible for regular loan repayment. However, they also both have the same access to borrowed funds.
The co-signers role is to improve the primary borrower’s chances of getting the best options in terms of amounts and rates. If you do not have a good DTI or credit history, a co-signer can be of great help. However, they do not have any rights to the assets in question or the money borrowed.
Both co-signers and co-borrowers are responsible for the loans if the primary borrower defaults. The main difference is that a co-signer does not have a lot of benefits in this situation.
Having a co-signer with good qualifications, such as a credit score, definitely helps the main borrower get the best rates. Make sure you only cosign loans for someone trustworthy so you do not end up with a repayment of someone else’s full loans!
Being eligible for large loans and the best interest rates is more difficult than it sounds. It is especially challenging if you do not have a steady income, good credit, or valuable assets. Luckily, in this situation, there are other options! A lot of people decide to look into loans that allow a co-borrower.
This person is someone who trusts you, and you trust them. Once the agreement is signed, you are in it together. The responsibilities on the loans are the same for both, and you can both benefit from the cash borrowed. If you are willing to make the repayment along with another person, there are numerous options available.
- When is a co-borrower a good idea?
When you realize you do not meet the lender’s requirements, your credit rating is poor, or you cannot get larger loans, think about getting a co-borrower. Having another name on loans can definitely help you get a better deal.
- Does a co-borrower have to have a good credit score?
Yes, they must have a good or excellent credit score, depending on the lending company. On mortgage loans, the credit scores of all borrowers are considered. This might also help with getting low interest rates.
- What will be with my co-borrower if I won’t pay the loan?
The co-borrower will be responsible for the repayment of the loan if you fail to do so. For this reason, it is always good that both sides can trust one another fully. Also, make sure you have sufficient funds for repayment, so your co-borrower does not end up with your entire debt. Your credit scores will also be damaged.
- Who should I take as a co-borrower?
There are many options when choosing a co-borrower. This can be your family member, best friend, or spouse. Generally, these are people that you can trust or you have financial assets in common.
- Can I get my relative as a co-borrower?
Yes, it usually does not matter who the co-borrower is to the lender. But this decision should matter to you, as this is a big step that requires a lot of responsibility. They should have good credit, sufficient DTI, and so on.