What is a Co-Borrower and a Non-Occupying Co-Borrower

When you pre-qualify for a mortgage, having a co-borrower on the loan can be helpful. But what is a co-borrower, and does the co-borrower have to live with you? Here is a closer look at how co-borrowers work and how you can use one to help improve your loan acceptance chances.

What Is a Co-Borrower?

A co-borrower is someone who has their name on the loan documents and uses their income and credit score as part of the loan process. In this type of agreement, the co-borrower is a borrower on the loan, which means they have the obligation to pay back the loan, just like the loan’s original borrower.

On many home loans, the co-borrower is the spouse or significant other that will share the home with the first-named borrower. Most married couples don’t think twice about naming their spouse as a co-borrower, and the spouse’s income will help with the loan process. If the spouse has a credit problem, the loan agreement will be based primarily on the highest credit quality borrower.

Lenders like co-borrowers in most instances. Loans with more than one debtor are at a lower risk for default. Having a co-borrower will increase your chances of getting your loan accepted.

What is a Non-Occupying Co-Borrower?

Most of the time, a co-borrower will be someone living in the home. However, it is possible to have a co-borrower sign the loan who does not intend to live with the primary buyer.

A non-occupying co-borrower is willing to take on the loan’s responsibility if the original borrower defaults but does not plan to occupy the property.  Sometimes, parents will co-sign a loan with their adult child because they have credit problems or minimal credit history.

A non-occupying co-borrower takes on the same risk as a co-borrower but does not enjoy the benefit of being a resident of the home.

The benefit of a non-occupant co-borrower is the difference it makes in the math for the loan process. For example, if the primary borrower has too high of a debt-to-income ratio, adding a co-borrower with more income or less debt can change that ratio and get the loan accepted. Similarly, if the primary borrower’s credit score is low, the loan can be based on the co-borrower’s score.

Risks Faced by Co-Borrowers

Being a co-borrower is a great way to help someone struggling to come up with the right balance of credit score and income to qualify for a home loan. Many loving parents will step into this role, but it’s not without its risks.

As a co-borrower, the individual is fully responsible for the loan. If the primary borrower can’t make a payment, the co-borrower is fully responsible. Should the loan go to actual default, the co-borrower’s credit will take a hit.

In other words, a co-borrower could end up paying the entire amount for the home loan if the original borrower can’t do it or chooses not to do it. That needs to be a risk that the co-borrower is willing to take before entering into this agreement.

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