More first time buyers are requiring the assistance of co-borrowers to enable them to proceed with a home purchase. Here are a few items to know about co-borrowing.
There are no special restrictions and/or requirements when the co-borrower(s) intend to occupy the subject property. A non-occupying co-borrower, however, must meet certain requirements.
Usually this category of co-borrower is used to strengthen the occupant borrower’s qualifications. Generally, the non-occupant co-borrower would exhibit good cash reserves as well as financial strength, in the event it should ever become necessary to assist with mortgage payments.
Most frequently, this type of co-borrower is a parent or relative of the borrower. If the co-borrower is not a “blood relation”, a long standing personal relationship must be established and verified.
Qualifying ratios for the occupant borrower(s) varies depending upon the type of loan acquired. FHA allows an immediate family member to co-borrow and there are no requirements for the occupant borrower to qualify in any way “individually”. In conventional financing, the occupant’s qualifying ratios should typically not exceed 35/43 (35% for housing expense and 43% for overall debt ratio). Strong compensating factors for the occupant borrower will allow some stretching of these ratios. USDA loans require all borrowers to be occupants as does VA financing. VA additionally requires any co-borrower to have VA eligibility.
There are several considerations regarding payments and liability when using a co-borrower to acquire a loan. Often, the occupant borrower’s housing/rent payment will increase with the new mortgage payment…a large increase is known as “payment shock”. Even though the borrower qualifies via the added financial strength of the co-borrower, the entire monthly mortgage payment is usually expected to be made by the occupant borrower. A borrower might answer a simple question to determine if it is wise to proceed…while making the smaller rent payment were you able to save monthly the amount by which your new payment will increase? If not, how do you intend to make the higher payment without undue hardship? It is easy to get caught up with the emotion of owning your own home and say “we can make those payments, if we only budget more carefully”. But, will there be enough savings via budgeting to make the payment realistic?
Often misunderstood is the co-borrower’s legal liability for repayment of the loan. The co-borrower can not escape responsibility for the mortgage debt by merely relinquishing ownership (i.e., executing a quitclaim deed for his/her ownership interest). If the borrower does not make payments, the lender can seek payment from the co-borrower. Any late payments, delinquencies and/or foreclosures will most likely blemish both the borrower’s and co-borrower’s credit rating. The only way to be relieved of loan liability is for the borrower to refinance and remove the co-borrower from the loan.
It is advised that all parties to the proposed transaction meet with the lender to discuss all aspects of the co-borrowing process. Pre-approval consultations are FREE and easy to schedule. Call Humboldt Home Loans today.