A co-applicant is an additional person who is considered in the underwriting and approval of a loan or application. Co-applicants can improve the chances of loan approval or even get you better loan terms, since it involves additional sources of income, credit and assets. It is not the same as a co-signer or guarantor, as a co-applicant will have more rights and responsibilities.
A credit application for both borrowers will be reviewed by an underwriter, where the credit scores and profiles of both borrowers will be considered. More favourable lending terms are usually established based on the credit information from the higher quality borrower. Often borrowers with higher credit can help those who are having difficulty getting financial approval or even lower the interest rate on a loan for those with average credit. It can also allow you to afford a higher value home if you apply with a co-applicant as it can increase the principal amount received from a loan.
Many people decide to co-own a home as joint tenants or tenants-in-common. It’s important to establish the co-ownership type before buying. If one of the owners in a joint tenant agreement dies, the other owner will receive the shares of the home. In a tenants-in-common arrangement, each tenant owns a portion of the property which becomes a part of their estate when they die. Buying with a co-applicant is a very important decision and you must be sure you trust the other buyer to make payments on time, as everyone’s credit score on the mortgage will be negatively impacted if they fail to do so.
Agree on the details
Before signing, all details and agreements should be clear to everyone. Ensure all expectations and contractual arrangements between parties are discussed, such as what would happen in the scenario that one would want to sell. It is also wise to specify the percentage each person owns of the property if it is not being split equally.
Since there are risks associated with being a co-applicant, it’s important to consider if it’s in their best interest. Here are some things to consider before agreeing to become a co-applicant:
- Mortgage payments will be visible in the co-applicant’s credit report. This can impact any future mortgage applications on other properties, which could result in them not receiving the loan or financing needed if they choose to buy another property in future.
- If you cannot make payments and your co-applicant can’t make up for your short fall, both you and your co-applicant will be impacted as you are both legally responsible for any missed payments
- If your co-applicant has never purchased a home before, they would lose their ability to participate in specific first-time home buyer programs for any future purchases, which could result in them having to pay higher closing costs. This is because being a first-time home buyer is based on never having owned any property and as a co-applicant you are deemed to be a co-owned in the property.
- If the property is sold and you aren’t living in the home, your portion of the sale may be subject to capital gains.
To learn more about how co-applicants can affect how much home you can afford, read here
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