Co-borrowers strengthen a mortgage application.
The term "co-borrower" refers to joint applicants on a mortgage application. A young borrower may have a parent serve as a co-borrower on a Federal Housing Administration (FHA) loan until he establishes a credit history. In such cases the parent effectively becomes the cosigner on the loan until their child's financial situation stabilizes. Lenders look at four factors when approving a mortgage: the size of the down payment, credit score of borrowers, debt to income ratio and financial documentation.
Basic Qualifications for Borrowers
All borrowers must be over 18 years of age. Co-borrowers need to verify income; they can do so by providing pay stubs, bank statements and tax returns. Co-borrowers must not have any judgments, excessive debt or large monthly payments that may reduce the ability to repay the mortgage.
Only FHA loan applicants may have a parent as a cosigner. Basic mortgage applications require that both co-borrowers meet the debt to income ratio on their own.
Down Payment
Co-borrowers on a mortgage may contribute to the down payment. Larger down payments improve the overall strength of your loan application. The size of the down payment demonstrates to the lenders your level commitment. Lenders prefer 20 percent of the value of the loan as a down payment. Borrowers who do not have this percentage may need to add private mortgage insurance (PMI). The Federal Reserve Bank of San Francisco explains adding PMI to a mortgage allows for a down payment of as little as 3 to 5 percent.
FHA loans typically have a smaller percentage minimum of 3.5 percent. According Bankrate.com writer Tracie Velt, an FHA loan allows mortgage down payment assistance provided by employers, government agencies and relatives.
Credit Score
Co-borrowers with high credit scores will receive lower mortgage rates. As credit rates and mortgage values constantly fluctuate, try to keep up a good credit history prior to application. Lenders understand that younger borrowers may not have much of a credit history. Lack of credit history does not, however, excuse late payments, high amounts of credit card debt and other high-risk behavior. Often FICO scores of 700 and above qualify for much lower rates than those with scores under 600.
Debt to Income Ratio and Income
Co-borrowers serve an important role when lenders calculate the applicants' debt ratio. According to Bank Rate, lenders calculate two types of debt to income ratios. The front-end ratio requires that the average monthly mortgage payment does not exceed 28 percent of income. Co-borrowers who provide additional income in this instance dramatically increase the odds that the mortgage payment will not exceed 28 percent of the income between the two borrowers.
Lenders calculate a back end ratio, which takes into consideration all the monthly liabilities against your income, including the proposed mortgage. Bills such as car payments, minimum monthly credit card payments and child support encompass a small portion of what expenses are considered. The maximum back end ratio for a mortgage is 36 percent of liabilities against income.
For example let's say you and your husband (the co-borrower) apply for a mortgage. You make $50,000 a year; he makes $70,000. Alone your maximum ratios are $1,166 and $1,500. By adding your husband as a co-borrower the new maximums are $2,800 and $3,600 per month.
FHA loans have higher debt to income ratios of 31 to 43 percent.
Tags: down payment, credit history, debt income, back ratio, credit card, debt income ratios