When you do not qualify for a loan on your own, you might consider asking someone to cosign on the loan with you. In addition to a cosigner, however, is the co-borrower. While the two names sound synonymous, they are different, meaning that they are handled differently by the bank and they both have different ramifications in the end.
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What is a Co-Borrower?
In general, it is considered more beneficial to be a co-borrower than a cosigner. This is because co-borrower has rights when it comes to the home because he gets half ownership of the home and his name goes on the mortgage deed and title. As a co-borrower, all circumstances of his life are factored into the ability to get the loan. The bank will look at the co-borrower’s credit history, income, employment and assets to determine your eligibility for the loan. When you have a co-borrower, your income and assets are combined, but your credit is still looked at separately, especially if trying to obtain a conventional loan; the lender will look at your credit scores separately, generally taking the lowest of the two average scores between the two of you to qualify you for the loan.
What is a Cosigner?
A cosigner, unlike the co-borrower, does not have any interest in the property. This means that his name does not go on the title and he does not have any ownership of the property. The co-signer is evaluated on his own to determine whether or not he can cosign for your loan. The lender will look at the same factors that he looks at for the co-borrower, including the income, assets, liabilities and credit scores of the person applying with you. If the person is eligible on his own merits, he might make your loan application look more appealing and allow you to get the loan that you desire. The largest downside of being a cosigner is the fact that if the original borrower were to default on the loan, the cosigner is then liable for the debt. The mortgage, whether defaulted on or not, appears on the cosigner’s credit report, which could affect his ability to get his own loans if his debt-to-income ratio is too high or if the original borrower pays the mortgage late or does not pay it at all.
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When Bad Things Happen
Even the most well-meaning borrower can have issues when it comes to paying his mortgage. There are unforeseen circumstances that can occur including losing a job, having serious health issues or becoming completely incapacitated – making it physically impossible to pay the mortgage any longer. When this occurs, the cosigner is immediately liable for the payments and for the entire balance of the loan. This is one of the reasons that many banks frown upon cosigners simply because it puts them under a large amount of stress should something happen in the future; something that they probably are not considering at the moment when trying to help someone that they know and love to get a mortgage.
Think Hard Before Asking
Your intentions are likely innocent when you ask someone to cosign on your mortgage if you are unable to obtain it on your own, but you are asking a lot out of that person. Asking someone to guarantee a loan that you are unable to qualify for on your own is very risk for that person, no matter how honest or well-meaning your intentions. Rather than asking someone to cosign, it is best to wait until you have a co-borrower or someone that will share the property with you and be able to contribute to the income and assets that qualify you for the home.
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