The term “co-borrower” is one with which real estate investors and those breaking into the market should be familiar, largely since it can enhance borrowing capacity. However, having a co-borrower, or being one, is not always a good fit.
Just what is a co-borrower? Here is that and more.
Buying a house or other property is a big deal. Perhaps the buyer has saved up for a down payment and is ready to make the move. However, what if the savings are insufficient or their credit history is lacking.
Enter the co-borrower.
Also known as a joint applicant, a co-borrower is an individual who applies for a loan with someone else and shares equal responsibility with them. In other words, both borrowers are liable for loan repayment.
People typically use a co-borrower when purchasing a house with a family member or friend, or they need another person’s income to qualify for the desired property. Another common reason is because their credit is not up to par. Sometimes, two people merely wish to be on the loan together.
Note that the co-borrowers typically share the property’s title, although that is not always the case. If the title and loan are separate, and a co-borrower is not on the title, they still have responsibility for the mortgage.
While it is common for the terms “co-borrower” and “co-signer,” which are similar, to be used interchangeably, there is a big difference between the terms.
The difference between the two is that, from the start, the co-borrower shares loan ownership and repayment responsibility. By contrast, a person who cosigns a loan is not liable for repayment – unless the primary borrower fails to make payments.
For those reasons, it is more common for a lender to permit a co-borrower than a so-signer. In fact, because the lender is reassured that multiple income sources can go toward loan repayment, co-borrowers are more likely to receive bigger loan offers.
The similarity between the terms is that, in either case, the parties are equally responsible for the loan.
Whether or not one person is on the title, however, is a different issue and is a matter to be worked out among the borrowers themselves.
Ultimately, a co-signer is generally preferable solely if a co-borrower will benefit from the loan. For example, if a person who does not have sufficient credit seeks a personal loan, the lender could decide that such issuance is too risky unless a person who has superior credit agrees to share loan repayment responsibility.
Whether one should pursue a co-signer or co-borrower depends largely on their objectives.
Co-Signer – A co-signer is not required to share responsibility for loan repayment, nor must they put up lender collateral. Further, if the primary borrower makes their loan payments on time, the co-signer need not worry about loan repayment and could still wind up with a better credit score.
On the other hand, a default by the primary borrower means the co-signer is on the hook for loan payments, and they will not be able to use loan funds and could have trouble getting approved for other loans.
Co-Borrower – A co-borrower directly benefits from the loan, and the lender could offer a higher loan amount and a lower rate. Also, because each borrower shares equal responsibility, additional loan collateral may not be required.
The process for applying for a loan with a co-borrower is essentially the same as when one is applying by themselves. The sole difference here is that multiple people are applying.
In other words, the bank will consider what it always does: down payment, income, and credit score.
Lenders will evaluate the credit reports of both borrowers in a co-borrowing situation. Gaining a co-borrower could help bolster a low credit score. Then again, it might not. But adding the other person’s income can help with the overall debt-to-income ratio – a metric that tells lenders how much borrowers can afford, since it sizes up one’s gross monthly income against recurring monthly payments such as for mortgage, student loans, personal loans, minimum credit card payments, and auto loans and the like. Eligibility for most mortgage options generally requires a ratio of no more than 43 percent.
When someone applies for a loan as an individual, the lender considers a credit score that is a median of the three major credit bureaus: TransUnion, Experian, and Equifax. However, in a co-borrower situation, the lender typically takes the lowest median score of all co-borrowers.
With Fannie Mae loans, though, there is a twist. Rather than factoring in the lowest median credit score, it averages out the borrowers/ median credit scores.
Co-borrowing is fairly common among family members and business partners, although it does require trust and communication. It is one of those situations where, if all goes well, it was the ideal solution. However, if one party cannot or is unable to uphold their part of the responsibility, the relationship could sustain lasting damage.
In general, co-borrowing works best if both borrowers would benefit from the loan. Say two individuals start a business together, they may seek to get a personal loan as co-borrowers and work in tandem toward repayment. Both people directly benefit from the loan and go into the transaction with full understanding that they each will be making payments.
As with most anything else in the investment space, there are benefits as well as drawbacks to having a co-borrower.
On the positive side, a co-borrower’s purchasing ability can be enhanced by having another person on the application. For example, a person may be eligible for a bigger loan amount, since a co-borrower generally adds more income to an application. More income lowers one’s DTI, which is a major factor for lenders, in addition to one’s down payment.
Another possible benefit to having a co-borrower is the possibility of multiple loan options. Since Fannie Mae uses the average of the borrowers’ median credit scores, having a co-borrower might allow an individual to qualify for a conventional loan. Such a loan, in many cases, can carry more advantages than other options.
Also, adding a co-borrower to a mortgage loan application could help procure a lower loan interest rate.
In terms of possible drawbacks, a co-borrower’s credit standing can be affected by the primary borrower’s actions. Thus, it is wise for the investor or homebuyer to first be confident of their and the co-borrower’s ability to make loan payments. It is also crucial to understand that if the co-borrower’s income drops or disappears, the other borrower will be liable for loan repayment.
Another potential co-borrowing downfall is that the two borrowers are in it together over the long term. This means that even if “life” happens – there is a marital separation or divorce, for example – payments still must be equally split. That is why, in divorce agreements, there is a clause that gives the individual who gets the property a specified time period to refinance.
Just as there is no risk-free investment, there is no perfect investment. However, real estate’s popularity endures due to the market’s many benefits, including a hedge against inflation, cash flow, leverage, tax advantages, and possible steady secondary income. Adding real estate to holdings that contain stocks can also lower overall portfolio volatility.
As an alternative investment platform, Yieldstreet offers more asset classes beyond stocks and bonds than anyone. Among its offerings are opportunities in real estate in private real estate, with minimums beginning at just $5,000. The private real estate market has, since 2000, performed better than stocks and fixed income on a risk-adjusted and absolute basis.
In addition, Yieldstreet has commercial offerings that include commercial real estate debt. Yieldstreet’s program, unlike with traditional crowdfunding, pre-funds transactions to generate secondary income for investors.
Yieldstreet also offers a real estate investment trust (REIT), which enables capital investments without having to hold physical properties. Such trusts, in general, own commercial properties that can include apartment buildings, hotels, and office buildings.
Yieldstreet’s Growth & Income REIT, which has minimums starting at $10,000, makes equity investments in the nation’s top markets with property types including self-storage, hospitality, multi-family, and retail.
Another reason real estate remains a popular investment is because, increasingly, investors understand the importance of portfolio diversification – mitigating risk by crafting holdings with disparate asset types overall. In fact, such diversification is vital to long-term investing success.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Despite potential drawbacks, co-borrowing can allow investors to take advantage of bigger opportunities or projects than they ordinarily might be able to. The real estate market in general is important in terms of key benefits including portfolio diversification.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.