Mortgages can be a great thing to have for those looking for an affordable house, but not everyone can get one. Sometimes restrictions apply for loans. Lenders can also be picky about who they will lend money to. People with bad credit or no credit are usually turned down for loans, even if they need them.
If you can get home loans, some lenders will offer you lower interest rates for having another person with good credit sign on the loan, which means you need to have a co-borrower or co-applicant. But before you encourage a friend or relative to help you out, understand the pros and cons of getting one for your mortgage.
The Pros of Getting a Co-Borrower for the Loan
A co-borrower is someone who agrees to make the repayments if you can’t or don’t want to. You will probably need a strong, responsible person with good credit to act as your guarantor. If this person has assets, it’s even better because then they will be protected if, for some reason, you can’t pay back the loan.
Other benefits of having a co-borrower include:
- The lender usually reduces the interest rate for joint applicants: As a way to entice people with good credit to agree to be a co-borrower, lenders sometimes reduce the interest rates for joint applicants.
- Having a co-applicant means both people are responsible for repayments: If you and your co-applicant both make the repayments, it will be easier for you to get a loan. A guarantor is also always legally and financially responsible for the debt. If they have assets, their possessions could help secure the loan if you default.
- The loan becomes more affordable and easier to pay: With a co-borrower, you can afford to take out more money and get a lower interest rate. Your payments will also be easier to repay because there’s someone else helping you pay back the loan.
The Cons of Getting a Co-Borrower for the Loan
Despite the benefits of having a co-borrower, this step demands careful decision-making because of the following disadvantages:
- You Will Be Responsible for Their Defaulting
A co-applicant is legally responsible for the repayments if the other person defaults. If your co-borrower can’t keep up with their share of the repayments, you will be held accountable for it. Even if they were only a few days late on their payments, you could lose your home to foreclosure or, worse yet, end up in court.
- Your Credit Score Will Be Affected if They Defaulting
If your co-borrower doesn’t make their payments, there’s a high risk that you could be sued for the money they owe. And if the lender wins the case, it will affect your credit score too badly because lenders may see you as a risky borrower.
- Your Co-Borrower Might Change Their Mind at the Last Minute
Some lenders tell you to choose a co-borrower carefully. If they change their mind, you can’t change it back even if there’s been no contract drawn up. In that case, you’ll be stuck in an awkward situation where you have to convince your co-borrower to repay the loan.
- You Need to Be Willing to Accept Responsibility for This Person
When you share a loan with someone, you also serve as the other person’s guarantor, which means they are asking you to take responsibility if they default on the loan. This is a big deal because there’s no way you can say no if they ask you. You need to be willing to take responsibility for this person, so only sign a mortgage with a co-borrower if you’re 100% sure that you can handle it.
- The Lender Might Care More about Their Credit Score than Yours
If your credit score is low or nonexistent, lenders will see you as too risky to act as a co-borrower. Because of this, they may decide to lower the amount that you can borrow or charge you more for interest.
Getting a co-borrower for a loan is a great idea in some situations, but in others, it can be a huge mess of trouble for everyone involved. Take all the time needed before making this type of decision and only do it if you know that the loan will get paid back promptly and that nothing will go wrong with your credit score.
Otherwise, find ways to secure a mortgage by yourself. These include increasing your credit score (this takes only about six months or a year), increasing your down payment, comparing lenders, opting for non-conventional mortgages like USDA and FHA loans, providing proof of higher income, or improving your debt-to-loan ratio.