Co-Borrowing: A Mortgage Lending Choice for You?

Trending: More young adult home buyers seek additional financial support with co-borrowers

Saving up for a down payment on a mortgage loan is a hurdle for many first-time buyers, especially in a competitive real estate market where prices are high. 

Consequently, buyers may get financial help from family and friends either as an outright gift of money or—for a growing number of borrowers—with the financial support of co-borrowers.

A recent FreddieMac analysis shows “the share of young adult borrowers with a co-borrower age 55 or older has increased since 1994.”

The number of buyers with co-borrowers hit a peak in 2015, declined, and has once again spiked, the post says.

“In 1994, 1.3% of young adults who were first-time homebuyers listed co-borrowers age 55 or older, and the share has not fallen below 2.5% since 2012,” says Freddie Mac.  “In the past two years, the share has increased one percentage point.”

It is interesting to note that the timing of this growth of co-borrower assistance coincides with home price increases.  It may be that some younger borrowers require a financial boost from a co-borrower to complete a home purchase.

What is the difference between a co-borrower and a co-signer?

Simply put, the difference between co-signers and co-borrowers is the amount of investment they have in the loan, with a co-borrower taking greater responsibility—and ownership:

·        Co-signers often have a close relationship with the borrower and agree to make any loan payments the primary borrower misses, but they have no ownership in the asset.  Without this promise from a co-signer, borrowers may not be eligible for a loan.  At some point, the primary borrower may be able to refinance to remove the co-signer and end their responsibility toward the loan.

·        Co-borrowers apply for the loan along with the other party and share liability for payment.  Such applicants will likely be eligible for bigger loans because they pose a lesser risk to lenders.  A home purchased by co-borrowers gives all parties a share in ownership, as well as a financial responsibility.  All borrowers would have their names on the home’s title.

Questions to ask yourself before seeking a co-borrower’s help:

·        What are the risks of working with a co-borrower?  Be sure you know their financial habits—can they make their payments?

·        How will working with a co-borrower impact all borrowers’ future financial goals? 

·        Know your own financial circumstances, too: can you afford the loan payments?  How stable is your income?

Higher home prices can pose bigger challenges in homeownership, but as the growing trend of young adults seeking assistance from co-borrowers shows, the dream of homeownership can still be a possibility.

Could co-borrowing on a mortgage loan work for you?

Post authored by Lora Bray.

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