Behind every home purchase is a significant financial collaboration. In more recent years, co-ownership has become more common, including teaming up with family members or friends. However, understanding how many people can be on a home loan is vital to determining what you can achieve together, and what to consider before you jump in.
According to JW Surety Bonds, nearly 15% of Americans surveyed have co-purchased a home with a person other than their romantic partner, and another 48% would consider it. Because joint mortgage loans offer plenty of advantages, they are an attractive option to some—financial responsibility is shared, borrowing power is increased, and larger loans with better interest rates may be more attainable when pooling resources with another party.
RELATED: Is Co-Ownership A Good Idea? Buying A House With a FriendTo better understand the ins and outs of co-borrowing, co-signing, or co-owning, let’s define a few things, like the joint mortgage loan.
Understanding Joint Mortgage Loans
A joint mortgage loan is a mortgage agreement with two people on it. The persons signing the loan are sharing responsibility for the loan repayment. Note that this is different from joint ownership, which is sometimes used to avoid placing one person on the loan because of a lower credit score (to obtain a better interest rate and qualify for a higher loan amount). Only one owner’s name will appear on the mortgage, though both parties technically “own” the asset.
WAYS TO TAKE TITLE WITH MULTIPLE CO-BORROWERS
There are three ways to take title when there is more than one person on a loan:
Sole ownership. Only one person is listed on the deed—and they have homeselling rights.
Joint tenancy. Every co-borrower is a co-owner, with shares divided equally.
Tenants in common. Every co-borrower is an owner, but each share may be distributed according to how much they put down for the down payment or how much they contribute to the monthly mortgage payment.
Home Loan Eligibility for Joint Applicants
The process of applying for a joint mortgage is similar to the process you’d expect if you were taking out a mortgage alone. The lender will take into account all of your finances: your credit score, income, employment history, and your existing debts. The lender will consider every person’s credit score to determine which loan the group will qualify for.
RELATED: How Your Job Affects Your Home Loan
Typically, with a joint application for a conventional mortgage, applicants will be expected to:
Have a credit score of 620 or higher on conventional loans or 580 or higher on Government loans
Have an average debt-to-income ratio of 43% - 50% or less
Afford a 3% down payment at minimum
Each person wishing to be on the loan must submit a separate application.
But how many people can be on a loan, exactly?
How Many People Can Be On A Home Loan?
Typically, no more than four or five co-borrowers are typically allowed on a home loan. Because of the software used by Fannie Mae and Freddie Mac, the limits are practical rather than legal. There could be, in theory, even more borrowers on one loan if you found a lender to underwrite the loan without using that limited software. However, most lenders will not go beyond four co-borrowers for a conventional loan.
It might be even more important to consider the legal and logistical aspects of partnering with multiple parties on a mortgage.
RELATED: When Do I Need a Co-Borrower?
CONSIDERATIONS BEFORE CO-BORROWING
Before signing on the dotted line, think long and hard about the implications of joint ownership and shared debt. How well do you know those you’re co-borrowing with? Because everyone’s financials factor into the approval, one outlier could bring down the amount you can borrow or make for a lower interest rate, adding to the overall cost over the life of the loan.
On the other side of the coin, Multiple co-borrowers on one loan could work well for those without as much financial stability and high credit standing—allowing them access to the homeownership path. Additionally, a group could apply for a larger loan amount to invest in a multi-unit building to reside in and rent out for passive income.
Legally, co-borrowing can be complicated. For example, a once-married couple going through a divorce may now have to either sell the home, buy out the other spouse, or split the proceeds of renting.
Add in a few more co-borrowers and you may have even more complications. Those complications could be due to:
Financial hardships, like job loss that leads to inability to pay their share
Life situations, like moving away and wanting to buy property elsewhere
Death, in which the remaining borrowers must decide how to pay their share
Essentially, if one co-borrower wants out (or has passed away), the remaining co-borrowers must determine the next steps together. That could include buying them out, selling their share, or refinancing to have their name removed from the loan—in which case you may end up with a higher interest rate.
If the person doesn’t have enough money to cover their share, the other co-borrowers must cover those costs.
How Does Cosigning Affect Your Credit?
In short, being a cosigner has the ability to affect your credit. The party you’re cosigning for can impact your credit score with their fiscal responsibility. If they are on time with mortgage payments, your score could go up. Conversely, if they’re late or behind on mortgage payments, your score could go down.
RELATED: How to Build a Good Credit Score
DIFFERENCE BETWEEN A CO-SIGNER AND A CO-BORROWER
To lenders, there isn’t a huge difference between a co-signer and a co-borrower—they’re both fiscally responsible, both factor into the qualifying loan amount and interest rate, and both will be liable if payments aren’t made on time.
However, if you’re signing up to be a co-borrower, it means your name is on the deed, whereas cosigners will not be named on the deed to the property. A co-signer is not part-owner.
As a cosigner (and as a co-borrower, it’d be worth following these tips, too) you can protect yourself:
Ensure the other party has enough funds or regular income to pay back the loan
Save enough money for a few months of the payment, just in case
Get access to statements to see whether payments are being made on time
Strategies for Maximizing Borrowing Power
If you’re considering having multiple people on a loan, you could greatly improve the home loan eligibility for joint applicants—you and those you partner with. Combining incomes may show you can take on a larger loan. Plus, combined credit scores are generally averaged. In the past, the lowest credit score was often focused on the most, but now, lenders are more willing to average out the credit scores to find a happy medium of all the credit scores.
That said, take into account the credit profiles, incomes, and assets of your co-borrowers seriously. Communicate well and often around your financial past, present, and future to get a better idea of where you might land if you want to sign a joint mortgage loan. Keep in mind: With more people comes more opinions and more financial complications to sort through.
If you’re ready to explore joint mortgage options, contact the PacRes mortgage experts today for personalized advice and solutions that fit your needs—and the needs of your co-borrower or co-signer!
