What is a Co-applicant?
A co-applicant is any additional borrower whose name appears on the documents for a loan and who receives benefits from the loan. A co-applicant can hold the title to a property and is beholden to the loan’s obligations. Additionally, they must sign all security documents.
Who can be a Co-applicant?
Most co-applicants are relatives, but technically, by law, they can be any person. There is one restriction, however: the mortgage professionals that are administering your loan cannot be co-applicants. This includes the lender, broker, real estate agent, among other kinds of professionals.
Why be a Co-applicant?
If you are a prime borrower and already have a house in your name, you can still be a co-applicant for another home. Now that you know it is possible, you should think about what type of co-applicant you will be. Here are a few things to consider:
- Do you intend to occupy this property? Or will you be a non-occupant borrower? Are you related to the co-applicant (this may be a requirement under certain circumstances)?
- Will your spouse be on the title? (They can still be on the title if not on the loan) Or are you the spouse of the other co-applicant?
- If you and your spouse are co-applicants for multiple properties, it is recommended to draft a prenuptial agreement that details how property ownership will be handled in the event of a divorce.
- Do you simply intend to help the other co-applicant receive financing? (You will need to disclose your credit and related financial information if so)
Depending on what type of co-applicant you are, there are various steps you will have to take in order to secure your status as a co-applicant. First and foremost, contact your desired lender and talk to them about your situation. If they are unable to accommodate you and your other co-applicant’s circumstances, say if they don’t accept co-applicants who aren’t relatives, then shop around for another lender who can help you receive financing. Some lenders prefer to avoid customers in complicated or otherwise risky situations and may shy away from intensely scrutinizing each applicant’s financial history.
If you own one or multiple investment properties, the lender may believe that you are seeking co-applicant status in order to acquire another investment property. A lender will usually be looking for you to have a strong or otherwise impressive financial profile, with a sizable monthly income, little personal debt, and thus a favorable debt-to-income ratio (DTI).
Additionally, lenders pay close attention to why you, the prime borrower, need or want to be a co-applicant. You will likely be asked to explain what led you to become a co-applicant, which is where the above questions come into play. There may also be restrictions around what kind of loan you can receive. Purchase or refinance? Some lenders will only allow co-applicants for purchase loans and not refinance loans. You should also be sure to obtain pre-approval from your lender, as this can greatly simplify your mortgage application process and avoid any future issues.
Benefits and Risks of Being a Co-applicant:
If you are thinking of being a co-applicant, there are various pros and cons you will have to weigh. Having a co-applicant can increase your chances of receiving financing. A co-applicant can improve an application’s overall debt-to-income ratio, which can ease a lender’s concerns about whether or not a borrower will be able to pay the loan back. However, as a co-applicant on a mortgage loan, if the other co-applicant fails, you fail too. There are several repercussions you may face if the other co-applicant defaults on the mortgage loan:
- Having to pay back the loan
- Sued by the lender
- Pick up the tab on any late fees
- Be reported to a credit bureau, which would negatively affect your credit score
Common Myths About Co-applicants:
There are many myths and misconceptions about being a co-applicant that can be hard to debunk. Many prospective co-applicants may hurt their financial situation by misguidedly becoming a co-applicant. Here are some of the most common misconceptions people have about co-applicant status:
1. Adding a co-applicant is required
Many people, especially married couples, think that they must have a co-applicant in order to receive financing. This is false. If you are financially stable and can qualify for financing on your own, then you can refrain from having a co-applicant. Remember: you can still add someone else to your property’s title without them being on the loan.
2. If my score is too low, they will use my co-applicant’s score
Lenders look at the lower of the two credit scores when evaluating a mortgage application with a co-applicant, as mandated by the Department of Housing and Urban Development (HUD). If neither your nor your co-applicant’s credit score is particularly favorable, don’t fret. Factors like debt-to-income ratio and other financial assets are also considered when evaluating your mortgage application.
3. If I am a co-applicant, then I cannot be a co-borrower
Though often treated as separate terms, co-applicant and co-borrower effectively mean the same thing and are interchangeable. If you are a co-applicant, then you are also a co-borrower.