It's often hard to reach your personal goals alone. If you don't have good credit and your bank account is low, you may find that debt is a huge concern for you. Therefore, when it's time to get to your next financial milestone, it could feel out of reach.
You want the best personal finance term possible, and one way to do that is to add another person to the application. This gives you a bit of a boost and is called a co-applicant.
Ultimately, this person applies for the loan with you, co-signing on it. That way, underwriters have another profile to consider when they decide to approve you for loan funds. Continue reading to decide if a co-applicant is right for you.
What Is a Co-applicant?
A co-applicant is someone who's considered along with the primary borrower in the approval and underwriting process of the loan or other financing needs. Many financing options accept co-applicants, such as car loans, home loans, a personal loan, and commercial property loans.
With that, alternatives to more traditional home loans accept co-applicants and could have a better personal finance term.
Co-signer vs. Co-borrower
Many people get confused about the terms "co-signing," "co-applicant," "co-signer," and co-borrower." They appear at first glance to be the same thing, but there are a few distinctions you should understand.
What's the difference between a co-borrower vs. co-signer? Typically, a co-borrower is equally responsible for the financing terms along with the initial borrower. More and more people require a co-borrower to get a home or car loan. Parts of California have over half of the applicants with a co-borrower or co-signer for the loan. Both of these people are responsible for making the monthly payments and have ownership claims to the house.
In most cases, people who want to borrow money require a co-applicant. This means that someone else applies for the loan along with the borrower.
When working with co-applicants, most companies are talking about a co-borrower arrangement. They both get listed on the title and have access to the funds. Generally, the co-signer and original signer of the loan balance have equal consideration.
A co-signer is the guarantor. Ultimately, a co-signer promises to pay off the loan if you can't do so. Generally, you need a high score, and a co-signer or co-borrower could make a huge difference in what terms you get after filing your loan application.
If everything goes well, the co-signer doesn't have to do anything once they sign the documents. They can't access any funds, and the borrower is responsible for regular payments. However, if the primary borrower misses payments, debt collectors can come after the co-signer and make them pay. Often, when the original borrower files for bankruptcy, the co-signer is still on the hook. In a sense, the co-signer agrees to pay if the other person's income isn't sufficient.
It's important to determine who the co-applicant is because they have access to the funds after the approval process is complete. Who's responsible for making payments on time?
Who Could Be a Co-applicant?
Some lenders may only allow family members and spouses to be a co-applicant. A parent could help their college-age student get a vehicle loan since the student likely doesn't have a high credit score to qualify for personal loans.
Sometimes, though, you can ask a business partner or trusted friend to be your co-applicant. Check with the lender to see who it accepts, and consider those people in your life with good financial habits and credit habits. Ask if they might be willing to help you.
Just don't hide the fact that they have a legal responsibility if you don't pay. The co-applicant shares the responsibility of making payments.
A good rule of thumb is to have anyone named on the title of the home added to the funding application and add their name to the final term sheet. That gives them an ownership stake in the house with you.
However, if you don't have a family member to help and ask business partners, they also have a stake in the ownership aspect, so be careful of who you choose.
Should You Use a Co-applicant When Applying for Financing?
Here are the steps to take to see if a co-applicant arrangement is beneficial to you and the additional person involved:
What Makes a Person a Good Co-applicant?
When selecting a co-applicant, you need to look for someone you trust that lenders can, as well. This means focusing on people with a healthy income and excellent credit. That tells lenders that this person can handle their debts responsibly. High incomes are also a good sign that this co-applicant has the funds on hand if necessary.
However, on a personal level, the co-applicant must be someone you trust and talk openly to about your money. Communicate clearly to them to build a strong financial plan and tweak it as necessary along the way.
Benefits of Having a Co-applicant
There are many big benefits of co-borrowing money with your co-applicant. These include:
- Better Chance of Approval - Applicants with low credit scores (below 700) have about a 32 percent chance of their mortgage application being denied. When you have someone else's good credit to back you up, you're more likely to hear that you're approved for your personal loans.
- Lower Interest Rates - If your application is more favorable, you may get better terms.
- Higher Principals - With this, you see more money. A couple with two incomes can afford a bigger house because they have a higher income together. The same idea works for non-married people.
- Potential Credit Benefits - Even if your scores are low, a history of paying off the loan on time can boost your scores. Make sure you stay on top of the payments, and both you and the other borrower might see a rise in your credit score. However, this depends on your habits.
- Potential Tax Benefits - When itemizing your taxes, you could claim tax deductions on mortgage interest payments made throughout the year. Make sure to speak to a tax professional to see if this is right for you.
What to Expect When Using a Co-applicant on a Loan Application
Are you ready to learn what happens when you work with co-borrowers during the application process? Here's what to know:
Standard Credit Score and Credit History Check
The lender looks at the applicant's credit history and credit score. Therefore, your past experiences play a part in how lenders decide to work with you. Good credit profiles with timely payments mean that you could see more favorable loan terms.
However, if you have a poor credit history, co-borrowing might be better. When you're both paired, you have strong credit, and the lender is more likely to look favorably on you during the application process.
How an Average Company Works with a Co-applicant
Taking out a loan is a big financial decision, so you should understand the steps within the process. That way, you've got more insight and can make better choices that work for you.
- The lender takes the average credit score of the primary applicant and co-borrowers. Therefore, you don't have to figure out which person has a better profile to be listed as the primary borrower. Both parties get equal consideration.
- Often, the company communicates with the primary borrower more. Therefore, it might be best for that one to live in the home, even if their scores are lower.
- When working on the application, the company makes it easy to add someone to the property for co-borrowing purposes. That way, they have rights to the title, and the combined income of the primary borrower and co-applicant is sent to the lender team.
- If necessary, the company helps you remove co-applicants and update the application to only review your income.
- When you fill out the application with the co-applicant's personal information, they receive an email to finish their part. Then, both people have to go in and sign the documents.
A co-applicant can help you get the loan you want or may even present a higher loan amount. When you get a loan with a co-applicant, the scores are averaged, and this can mean more favorable terms or the ability to get the loan. However, the mortgage loan must be paid by the secondary borrower if the primary borrower fails to pay on time.
This is an excellent idea for those with bad credit who want higher loan amounts, better terms, or a good chance of getting approved.