Applying for a mortgage on your own is a big deal. You have to be able to prove that you can afford the loan payments without any help. In addition, your credit score must be good enough to qualify you for the loan. If these things don’t apply to you, there’s still the possibility of the joint mortgage. When you apply for the loan with another person (usually a spouse), you both take responsibility for the loan.
We’ll look at the benefits of this type of mortgage as well as the risks.
The Top Benefits
As you can imagine, two is better than one when qualifying for a mortgage. Here’s how you may benefit:
If your income is not enough to qualify for a mortgage, you may benefit from a joint applicant. The lender can then use that person’s income to help lower your debt ratio. Of course, if you take a joint applicant’s income, you’ll also have to take his/her liabilities. Choose your partner wisely. Someone with a lot of debt and not enough income to cover it will only hurt your situation. The ideal situation is when you both have few debts and your combined income covers the mortgage, your existing debt, and leaves money on the table.
If your joint applicant has a significant amount of assets, this can help your loan approval. Most loan programs don’t require a specific amount of reserves. However, the more money you have on hand, the better. Lenders call this money ‘reserves.’ You can use this money to cover your mortgage should your income suddenly stop.
Lenders usually count assets based on the number of months of mortgage payments it can cover. If your mortgage payment is $1,200 and you have $4,800, that’s 4 months of reserves. If the lender doesn’t need the reserves to qualify you for the loan, they may use it as a compensating factor. In other words, it can help your case, should your credit or debt ratio be borderline to the program’s requirements.
Better Interest Rate
If the combination of your qualifying factors (credit, income, loan-to-value ratio, and debt ratio) are better with a joint mortgage, you may get a lower interest rate. Lenders base your rate on your riskiness. The riskier you are, the more likely it is that you’ll get a higher rate.
If you have a co-borrower that has great credit, good income, and low debts, it can help your situation. If their income helps lower your debt ratio, you become a lower risk. If they have great credit, it gives the lender 2 people to count on to make the mortgage payment. It’s a win-win for everyone involved, which usually results in a lower interest rate.
Higher Loan Amount
Because you’ll have two incomes helping you qualify for the loan, you often get a higher loan amount. Lenders base your loan amount on your debt ratio and your credit score. You have to be able to prove that you can afford the loan. If you can’t afford it alone, considering a joint mortgage could help you get the loan you need. Of course, if your joint applicant has bad credit or doesn’t have enough income, it won’t help.
The Risks of a Joint Mortgage
With the good usually comes some type of bad. A joint mortgage might provide the following downsides:
Higher Income Takes Priority
Unfortunately, you don’t get to decide who is the ‘primary lender’ on a loan. The lender decides for you. It’s usually the borrower with the higher income. If that borrower has a lower credit score, it could result in a higher interest rate and more fees. The riskier your loan, the more a lender will charge. You may find that they charge origination points or give you an interest rate as much as 1% higher than if you had great credit.
You May Buy More Than You Can Afford
Buying a larger home now may make sense, if you have a joint applicant. What happens if one of you stops working in the future, though? Let’s say you buy the house when you are newly married and don’t have children. A few years down the road, though, you have children and one of you stays home. Now you cut your income in half, but your mortgage doesn’t change. You still have to be able to afford it. Not biting off more than you can chew up front could help you down the road, before you even realize it.
A joint mortgage has is positives and negatives. You’ll need to determine what is right for you by figuring out what you can afford now and in the future. Think of the long-term. What do you plan to do with your life? Do you see one of you staying home? What if one of you lost your job, is it easy to replace?
The bigger mortgage isn’t always the right choice. Figure out what suffices right now, with a little room for expansion for the future without going overboard. This way you’ll reduce your risk of default should things change in the future.