Not everyone can qualify for a mortgage on their own. Many home buyers need to jointly sign for a mortgage -- usually with a significant other or family member -- to be able to buy a home. When this happens, both people on the mortgage are co-borrowers, and each is responsible for mortgage payments. In turn, each holds an equal stake in the house.
Effect on loan qualification
You and your co-borrower will have your credit score, financial history, and job history evaluated for a loan. Your rates and qualification eligibility will be affected by each other's financial history, so ideally, both of you have good credit.
Even if you don't, the good credit of one borrower can be enough to help the other borrower qualify for a joint mortgage. As long as your co-borrower has the credit score needed to qualify, his or her income and assets can be added to yours to get the loan you need.
Whoever is on the loan is responsible for the payment each month. If a payment is missed, both parties' credit scores are penalized. Likewise, on-time payments help both parties' credit.
Divorce and separation
Most co-borrowers are in a relationship. But if things go south or end in divorce, you will need to explore some options:
- Sell the home and split the profit.
- Refinance into a new loan with just one person on the mortgage.
- Convert the home into a rental and split the profit.
- Ask your bank to allow one party to assume the loan (rarely accepted).
- Maintain the current loan, keeping both parties responsible for the home.
- Settle who gets the home in court.
If you choose to refinance, the party wishing to keep the home needs to qualify for the loan alone. This can be problematic, as what was originally a mortgage evaluated with a combined income will now be a mortgage with only one income to consider. You may need a co-signer if your credit isn't good enough. A co-signer is someone without a direct interest in the property (parents are a common example) who will be responsible for paying the mortgage if you default.
In rare instances, your lender may allow one of you to assume the loan (take on full responsibility for the loan, releasing the other party). The lender will still want to make sure the person remaining on the mortgage loan can afford the payments each month. It's uncommon, but it's worth asking your lender about it
If you don't have enough equity in your home, you will probably need to continue with the mortgage loan as is by working out an agreement with your co-borrower. You may want to consider turning your home into a rental so you and your co-borrower can split the profit. If you go this route, make sure your loan allows the home to be rented out (for example, some state-specific loans don't allow it). If not, it will need to be refinanced into a loan that allows for it.
Updated from an earlier version by Laura Sherman