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Co-Borrowers: Do You Need One?

12/13/2010

If you’re a first time home buyer and you’re not sure if you’ll qualify for the home purchase mortgage you need, consider finding a co-borrower to sign onto the loan with you.  But before you do, understand the advantages and disadvantages associated with co-borrower relationships.

1.  A co-borrower won’t help your credit score.  If you have a bad credit score, adding a co-borrower with great credit won’t help you qualify.  The lender will make all decisions based on the lowest credit score attached to the loan.  If that’s you, you’re out of luck.  Repair your credit another way.

2.  Combined assets may help you qualify.  If you don’t have enough money in the bank to prove to your lender that you can afford the down payment, a co-borrower might save the day.  Lenders will consider all assets as combined in a co-borrower relationship, which means you can split the down payment cost.

3.  Combined income may allow you to take on a bigger mortgage.  Lenders will combine your incomes when determining whether you qualify.  This can help you qualify and pay for a higher loan amount.

If a co-borrower situation turns sour, though, getting out of the mess can be tricky.  There are two primary ways to dissolve a co-borrower relationship.

1.  Refinance the loan.  If you refinance the loan and replace it with a new loan, the co-borrower relationship is replaced by a single borrower arrangement, assuming you were able to qualify on your own.

2.  Sell the home.  Unfortunately, if neither of the borrowers is qualified to refinance alone, the home will likely have to be sold and the proceeds divided evenly.

All told, a co-borrower arrangement is typically not as beneficial in the long run as a single borrower arrangement.  But if you’re unable to qualify, combining your resources with a co-borrower may be the answer.

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