Just the Peaks

This newsletter at a glance

 
 

  • Each year, millions of loan originations involve some sort of 2nd party
  • While co-borrowers assume ownership, cosigners stay in the background
  • Everest gives you the complete scoop on multiple loan applicants

To secure financing for a home loan, many people need a companion
Here’s a simple breakdown of cosigners vs. co-borrowers

When issuing a loan for real estate, business investment, personal reasons and more, lenders have a laundry list of criteria. Nowadays, having a decent credit score is only the start. Banks also look at your credit utilization, income, and in the case of homebuyers, the percentage of the sum you’re contributing as down payment.

If you fall short in one or more of these categories, you’ll likely need someone to apply for the loan alongside you. By pooling resources and assuming joint responsibility, the team is stronger than the sum of its parts (at least in the eyes of the mortgage underwriter).

Sounds straightforward enough, but having ‘multiple’ borrowers does add some complexity. Bringing a second person on board may seem as simple as showing up with an extra body at closing. But there’s more. Which leads us to this month’s topic—cosigners vs. co-borrowers.

More than one co

What exactly is the difference between cosigning and co-borrowing? It’s not just a matter of semantics. The formal and informal responsibilities of cosigners and co-borrowers vary greatly. It’s important for potential homebuyers to understand the details associated with both.

It’s also worth noting that while some people have the ability to choose which type of co-applicant to use, others are given a specific borrowing requirement. This is typically due to the fact that the primary loan seeker fails to qualify, and therefore needs someone with a reliable track record to back them.

Before we break things down, check out these interesting stats associated with mortgage lending in America. Data was collected during Q2 of the year 2017.

Sign solo, or co-borrow?

  • In the selected time period, more than 2 million loans originated
  • Borrowers represented more than 87% of the U.S. population
  • Of all single-family purchase home loans, 22.8% had a co-borrower
  • Northeast areas had fewer co-borrowers, with instances as low as 10.3%
  • In California and Florida, co-borrowers were used nearly half the time
  • **To see the full origination report, visit ATTOM Data

Lend us your ear

In the aforementioned study, researchers made no mention of mortgage cosigning. So, what’s the difference between a cosigner and a co-borrower?

To start, these persons assume a similar duty: in the event of default, they are both responsible for repayment of the loan. In essence, a cosigner or co-borrower, if accepted by the bank, is agreeing to front the bill if the primary borrower skips out on payments.  The level of responsibility is where the two titles differ.

Acting as a sort of guarantor, a cosigner helps a person qualify for the loan—but he or she will not necessarily be making payments. A prime example of this borrowing relationship is seen when young people go to purchase their first home. Oftentimes, a more established parent or grandparent will cosign for them.
 

Key features of a cosigner:
  • Often used in order to qualify for the loan
  • Assumes no actual ownership of the home
  • Name listed on mortgage, but not on the title of the home
  • Must legally repay loan if main borrower does not
 
Key risks of cosigning:
  • Increases your debt to income ratio
  • Missed payments will affect your credit report
  • Liability may prevent you from getting your own loan
 
Best reasons to use a cosigner:
  • Your finances are not strong enough to qualify
  • You want to get a lower interest rate
  • You are young and lack credit history
Sometimes called the ‘co-applicant,’ a co-borrower usually signs because they too will benefit from the asset. Whether the person is a spouse, legal partner, fellow investor, good friend or relative, a co-borrower has ownership interest in the property (unlike a cosigner). This situation is most commonly seen when couples seek financing.
 
 
Key features of a co-borrower:
  • Often used in familial situations
  • Name listed on the loan AND title
  • Retains shared ownership of property
  • Is legally responsible for all payments
 
Key risks of co-borrowing:
  • Increases your debt to income ratio
  • If you miss payment, your credit score suffers
  • You may also incur costly late fees
  • Tricky situation if the relationship ends

 

Best reasons to use a co-borrower:
  • Combined incomes can help you qualify
  • You want to retain ownership alongside a spouse
  • One partner lacks a strong credit score
  • You can get a lower rate and larger loan amount
 
There’s more to this mortgage story, but for now, you know the basics. If you’re in the market for a home purchase, be sure to talk to your advisor about the many other advantages (and potential disadvantages) of using a cosigner or co-borrower.

Everest says: Whatever your loan, we’re the right co. for you.

What’s your financing fit?

Consider a recourse loan if you want term flexibility, restructuring options, freedom of management, and control over your cash flow. On the flip side, a nonrecourse comfortable with fixed terms, and don’t mind bending over backwards for the bank.

Everest says: The decision doesn’t have to be difficult
Consult with your advisor for CRE success