Resource Center Co-borrower, Morty's Whiteboard

When Should I Add a Co-Borrower to a Mortgage Application?

Coborrower on Mortgage

We’ve discussed whether to add a co-borrower to a mortgage application with many homebuyers and we’re always surprised to hear how many think having a co-borrower is a requirement for getting a mortgage.

Especially borrowers who are married – many of them believe that their spouse needs to be on the mortgage loan.

This is NOT a requirement.

Did you know that even if you’re married, you can qualify for a mortgage loan on your own?  If you and your spouse both want to be on the title, then that’s a separate issue, but sharing the title does not require both of you to also be on the mortgage loan.

Although it’s not a requirement, there are times when it makes sense to add a co-borrower to a mortgage application.

Let’s take a look:

The two numbers to really pay attention to when thinking of adding a co-borrower

The main question you need to ask yourself to determine whether adding a co-borrower makes sense is: what does that person bring to the table?

(Morty’s marriage counseling advice: do NOT ask your spouse what they bring to the table. The conversation ain’t gonna go where you want it to go.)

As far as mortgages go, there are only two positive things a co-borrower can bring to the table: income and assets.

Many people mistakenly believe that credit score is also something a co-borrower can bring to the table, but this, unfortunately, is not the case.

Really?

Yup. Lenders typically use the lower scoring borrower’s credit to underwrite the loan; so even if your co-borrower has stellar credit, but you have poor credit, this co-borrower won’t help at all from a credit perspective.

The ideal scenario for adding a co-borrower is when that person has a credit score no more than 20 points lower than yours and he/she has solid financials to strengthen your mortgage application.

Let’s run through a quick example to really take this point home:

To add or not to add?

Kim is purchasing her first home in the Lakeview neighborhood of Chicago and is thinking about adding her dad as a co-borrower. Here is a quick snapshot of Kim’s credit and financial profile as compared to her dad’s:

Scenario 1 – Financial Profile

Kim

Kim’s Dad

Credit Score

680

670

Monthly Debt Obligations

$2,200*

$1,000**

Monthly Income

$5,000

$6,000

Debt-to-Income (DTI) Ratio

44%

16.6%

*Kim’s monthly debt obligations include things such as car payments, credit cards, student loans as well as the mortgage loan for which she is applying.

**Kim’s dad’s debt obligations do not include the mortgage loan for which Kim is applying.

Even though her dad’s credit score is a little bit lower than Kim’s, it would likely make sense for Kim to add her dad as a co-borrower in this case.

Why?

Because Kim’s DTI Ratio is high and she may not qualify for a loan at that level (Ideally, the DTI should be no higher than 36%).

Adding her dad to the application would bring down the total DTI Ratio to 29% (($2,200+$1,000)/($5,000+$6,000)), a level at which they should comfortably qualify.

So once again, assuming that this loan program allows non-occupying co-borrowers (because even though Kim loves her dad, she doesn’t want to live with him!), adding Kim’s dad as a co-borrower strengthens the loan application.

Now let’s look at a different scenario:

Scenario 2 – Financial Profile

Kim

Kim’s Dad

Credit Score

680

780

Monthly Debt Obligations

$2,200*

$1,000**

Monthly Income

$8,000

$3,000

Debt-to-Income (DTI) Ratio

27.5%

33.3%

*Kim’s monthly debt obligations include things such as car payments, credit cards, student loans as well as the mortgage loan for which she is applying.

**Kim’s dad’s debt obligations do not include the mortgage loan for which Kim is applying.

In this scenario, Kim’s dad doesn’t add to the application and it likely doesn’t make sense to add him as a co-borrower.

Why not?

Compared to the last example, Kim’s monthly income increased and her dad’s monthly income decreased. At a DTI Ratio of 27.5%, Kim should be able to qualify for this loan by herself. Adding her dad’s monthly debts and income actually weakens the application.

Even though her dad has stellar credit (780), the lender in this case will probably use Kim’s 680 credit score because she has the lowest score of the two.

*  *  *

So this is it, folks. The decision to add a co-borrower depends on your particular circumstance, and now you know what factors should drive your decision.

Want an easier way to determine whether you should add a co-borrower or not without doing all the calculations yourself? In addition to walking you through the entire mortgage process, MortgageHippo’s mortgage calculator walks you through a co-borrower analysis to help you decide if it’s worth adding one.

Morty’s Whiteboard series

Morty’s Whiteboard series will not only give you the knowledge and information to help better understand your mortgage options, but will also help you make sense of that information and apply it to your personal situation.

Mortgage “experts” focus almost exclusively on sharing encyclopedic information on mortgages (e.g., what specific loan terms mean, where rates are going, how to pay points, etc.).

Of course, information is always important.

However, what these “experts” often ignore is giving you the right tools to make good use of that information. Think about this: How far would a homebuilder go without a hammer and saw? Blueprints alone are simply not enough if you don’t have the right tools.

At MortgageHippo, we share valuable information with you but focus equally on the tools; because with the right tools, the information is turbocharged and ultimately made more useful. That’s our goal for you.

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