When more than one person has signed up as borrowers of a loan to be equally responsible for repaying it, they are known as co-borrowers.
This is unlike co-signing when one party does not make payments on the debt obligations but becomes liable in the event of defaults.
The most common co-borrowering of mortgages is when a household purchases a house, and the husband and wife both signs on the note to become liable for the loan.
This can also frequently happen with siblings sharing a home.
Sometimes people voluntarily become co-borrowers even though they are not going to make a significant contribution (if any) towards the repayment of the loan.
For example, a couple of brothers might want to live together under the same roof. The younger brother then pays for the most part of the down payment because he has more cash on hand, and also the expenses of maintenance. The older brother, assuming his personal income alone is sufficient to get the required loan quantum approved, agrees on his part to meet the monthly payment obligations of the mortgage.
Under the above circumstances, we can see that younger brother has no need to be a co-borrower as he will not be repaying the loan. But for a sense of ownership, he still wants to be a co-borrower even though under legal technicality, he does not need to be a borrower to have his name on the title.
Co-borrowering for many reasons can create problems.
When one borrower has bad credit
When there are more than one applicant for a credit facility, all applicants’ credit record will be put through the paces to tabulate an overall credit score consisting of all borrowers’ credit behavior.
This means that when a borrower has adverse credit, it will affect the whole application.
As borrowers with bad credit are avoided like the plague by traditional lenders like banks, even though one borrower might have very good credit, a loan might still be outright rejected should another party have a recent unsettled bad debt record. At the very least, it’s going to give lenders a reason to charge a higher interest rate.
While different lenders might have their own internal guidelines to determine how severe a bad debt is, the point is that it will affect the application as a whole.
If this happens, the borrowers might consider just having the person with good credit sign up for the loan.
But in this case, the loan amount will be affected by how much loan his individual income can afford to borrow.
And there is the possibility of political issues as the other owner might insist on having his name as a borrower as mentioned previously.
Should the problem with joint credit be predicted, borrowers should try to solve the problem beforehand to maximize their chances from the onset.
If they failed to address this issue from the start, there is every possibility that the failure of the first application will affect the results of subsequent applications.
Otherwise, the co-borrowers might want to approach a lender that will not require income verification or credit scores.
Just a word of warning. Many of these loans are considered predatory loans that charge exuberant interest rates.
As a final resort, if just the single borrower with good credit does not have an income high enough to borrower a required loan quantum, getting a third party or family member with strong income and satisfactory credit involved should solve the problem.
Divorce of co-borrowers
While the most common reason for co-borrowers to split is due to divorce, it is by no means limited to this scenario.
Co-borrower “divorce” or “de-couple” don’t necessarily have to refer to a married couple. they can refer to typical unrelated co-borrowers too. It’s just a matter of expression.
Splitting of co-borrowers can cause very stressful problems. This is why it is a problem that is best prevented instead of cured.
The problems with splits can be generally put into one of two categories:
- Split with sale
- Split without sale
Here are some ways to prevent complicated problems on the split.
Split with sale
Sometimes legality requires a house to be sold should a married couple divorce. Sometimes even regular co-borrowers might be forced to sell. And often times, it happens by choice.
Whatever the case, the solution that seems the most fair if the proceeds from sale is divided accordingly to the contribution towards equity in the house by both parties.
If no middleground can be agreed, the parties should reconsider cohabiting.
Split without sale
The situation becomes more complex when there isn’t a sale.
This can often occur because one party refuses to sell. And any voluntary sale cannot be enforced without the endorsement of both parties.
Yet the party that has the full intention to remove his or her name from the mortgage can have justifiable reasons to insist so.
This is because he or she need to free up his or her name so that another mortgage can be taken up at maximum loan to value.
A lender finding out about the existing home loan will inevitably affect an applicant’s loan quantum and LTV.
While it is possible that the shares of the departing partner can be sold to the one staying, getting the name of the former off the loan is a different challenge altogether because lenders are under no legal obligation to release any one borrower from the books as long as the loan is not fully repaid.
This is assuming the staying borrower has the cash to pay off the leaving borrower in the first place.
In this case, the solution is to refinance the mortgage to a new one under a single applicant, the remaining partner.
This could force the single borrower to accept an unattractive loan due to circumstances.
Bear in mind that sometimes, co-borrowers might be forced to sell even though one party has every intention not to.
This could be due to meeting requirements of the law or that the staying partner cannot afford to pay off the leaving partner and maintain the loan repayments on his own.
This can present acquisition opportunities to real estate investors.
The conclusion to all these is that when becoming a co-borrower for a property purchase, do consider the possibility of a “divorce” and take steps to make things clear should it happen.
You might be hyped to own a house, but when it rains, it usually pours.