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Whether it’s your first mortgage or your third, purchasing a home is a huge milestone in anybody’s life. This means that no part of your decision-making process should be taken lightly. Before carrying out your application, there are a lot of things that you need to consider, for example, is your financial situation where it should be? Do you have a good credit score? And do you know the difference between a co-borrower and a non-occupying co-borrower? If the answer to the latter question is no, then you are in the right place. In this blog, we will be looking at just that as we discuss the risks, responsibilities and differences that will determine whether you will need a co-borrower or a non-occupying co-borrower.
What is a Co-borrower/ Non-occupying Co-borrower?
Before we go into which option you need, we’ll start by discussing what a co-borrower/ non-occupying co-borrower is. Forbes’ definition of a co-borrower states that “a co-borrower, or co-applicant, is someone who applies and shares liability for repayment of a loan with another borrower.” This arrangement is usually used when significant others are purchasing a home together, and, typically, the primary borrower will have a higher credit rating, although it is important to remember that both borrowers’ credit will be taken into consideration.
On the other hand, a non-occupying co-borrower is quite similar to a guarantor. This means that they don’t actually have a claim on the home, but as a non-occupying co-borrower on the mortgage, they are financially responsible for paying back the loan if the primary borrower is no longer able to do so.
The responsibilities
Now that we have discussed the differences, we feel that it is important to discuss the responsibilities of both co-borrowers and non-occupying co-borrowers. As co-borrowers are people that you will want to share ownership of the home with, they must be listed on the title of the property as they will have an ownership interest. In addition to this, they will be obligated to pay monthly payments, along with the primary borrower, however, it is likely that you will be able to qualify for a larger loan amount at a lower rate with them on the mortgage application. Of course, a co-borrower will also be responsible for signing all of the loan documents.
Alternatively, a non-occupying co-borrower will have no ownership of the property, which means that they will be listed on the mortgage documents, but not on the title. Their income can help you to qualify for a mortgage, which means their income, assets, liabilities, and credit history will be reviewed during the application process, and they will be liable for repaying the loan if the primary borrower is no longer able to do so.
The Risks
Of course, it is just as important to consider the risks that come with both, as it is to discuss their responsibilities. When you are determining whether you want to use a co-borrower, it’s important to consider that the co-borrower takes on the same responsibilities as the primary borrower, which therefore means, they assume the same amount of risk. This refers to being responsible for late fees if payments are not made on time, or at all.
Opting for a non-occupying co-borrower of course brings its own risks, especially for the co-signer. This process requires a lot of trust on the non-occupying co-borrowers behalf as their debt-to-income ratio will increase as a standard. In addition to this, if any payments are made late, then the primary borrower will be on their credit report, which may make it harder for them to obtain their own finance or credit.
While we can provide you with as much information as possible on co-borrowers and non-occupying co-borrowers, the decision will ultimately depend upon your circumstances, and whether or not you will be able to find somebody who will be comfortable with being your co-signer. If you would like more information on this subject, then please get in touch with a member of our team today.
Alternatively, if you would like to learn more about the mortgage process, we have lots of other blogs on the subject of mortgages here.