What Is A Co-Applicant And Do You Need One?

Maybe you’re not confident in your ability to get approved for a home loan so you’re considering taking on a co-applicant. Ideally, this person can help you get approved for a loan and receive the best terms. However, there are both risks and rewards to having a co-applicant, different from a co-signer who would only assume responsibility in the event of default.  

Here we’ll go over what a co-applicant is, whether having one can affect your chances of buying a home and the risks involved.

What Is A Co-Applicant?

Also known as a co-borrower on a mortgage or loan application, a co-applicant is a person who applies for a loan with you as someone who’s equally responsible. Most commonly, spouses or domestic partners are co-borrowers since they’ll typically want equal stake in the ownership of the property. However, anyone can be a co-applicant as long as they meet the lender’s requirements.

When using a co-applicant, both parties’ credit and income are equally evaluated when applying for a loan.

Why Might You Need A Co-Applicant?

As a borrower, maybe you don’t have a high enough credit score to get approved for a home loan. Or maybe you have other factors (like a high debt-to-income ratio) that show lenders you’re likely to default on a mortgage or other type of loan.

Having a co-applicant can also increase your chances of getting approved for a loan at the most competitive rates. When you lock in a lower interest rate, your monthly mortgage payments can become more affordable. A co-applicant can even help you secure a larger loan amount, increasing how much house you can afford.

How Does Your Credit Score Impact Your Need For A Co-Applicant?

Lenders look at several factors to see whether you’re deemed a risky borrower. In other words, how likely are you in the lender’s eyes to pay back your loan?

Your credit score is a number that shows lenders one facet of who you are as a borrower. The higher your credit score, the less risk you are to lenders. That means you’ll have a better chance of being approved for a loan and at competitive rates. It also means you’re less likely to need a co-applicant or co-borrower.

If relying more on your own creditworthiness, you’ll want to build your credit score before applying for a loan. It’s important to know what components make up your credit score to understand whether you need a co-applicant to begin with.

Here are the different factors that can affect your credit score:

●      Payment history: This can account for up to 40% of your credit score depending on the scoring model, making it one of the most important factors. On-time payment history shows that you’re more likely to pay back new and existing loans in a timely manner.

●      Credit utilization ratio: This is expressed as a percentage that compares your revolving credit limit to how much credit you’re using. Ideally, you’ll want to keep it at 30% or under to show that you’re not stretching yourself too thin.

●      Credit history: Also referred to as credit age, your score can be determined by the age of your oldest account and the average of your combined loan accounts. The older your accounts, the higher your score will be.

●      Credit mix: Lenders want to know if you can handle different types of loans, so the more types of loans you have (personal loans, student loans, business loans, etc.), the more positively your score will be affected.

●      New credit inquiries: Hard inquiries, such as when you apply for a new loan, will show up on your credit report. Many hard inquiries in a short period of time can make it seem like you’re struggling with your finances, negatively impacting your score.

Not sure what your credit score is? Use the credit report feature in Rocket Money^SM to easily monitor your credit score and view your full credit report.

Does A Co-Applicant Need Good Credit?

Not necessarily.

When a lender looks at loan applications, it’ll take the lower of the two scores into consideration when there’s a co-applicant involved. Meaning, if you’re relying on your co-applicant’s higher credit score to help you get approved for a loan, it probably won’t happen.

However, lenders will look at other factors where a co-applicant can help. For example, your co-borrower’s income will be taken into consideration when a lender decides how much to approve you for. That means if you normally wouldn’t have qualified for a loan on your own, adding your co-applicant’s income can increase your preapproval amount. 

Lenders also look at both your and your co-applicant’s debt-to-income ratio. If your co-applicant’s debt-to-income (DTI) is lower than yours, it can help lower the overall DTI on a loan application. This can lead to a higher chance of approval and lower interest rates.

The Risks Of Taking On A Co-Applicant

Having a co-applicant means that the other person has the benefit of ownership of the asset you’re financing (like your home or vehicle), so you’ll want to think carefully about whether that’s what you want.

For example, a co-applicant on a mortgage essentially means both of you have equal rights of residence in the home. For credit cards, it means both parties can use up all available credit and both are held responsible for repayment. In this case, you could be stuck with repayment if your co-borrower decides not to help.

Co-Applicant FAQs

Let’s look at some frequently asked questions about co-applicants.

Is a co-applicant the same as a co-signer?

A co-applicant is different from a co-signer in that a co-applicant is equally responsible for the loan, and has equal rights to the property at stake or line of credit. A co-signer, on the other hand, becomes financially responsible only when the primary borrower fails to make payments on their loan.

Does a co-applicant have to live with you?

A co-applicant doesn’t necessarily have to live with you to be equally responsible for the loan, but the rules vary by lender. Contact your mortgage lender to understand its specific living requirements for co-applicants.

How many co-applicants can be on a mortgage?

There is no law limiting the number of co-applicants you can have on a mortgage; however, some lenders may allow as many as three in certain cases. Reach out to your lender to find out how many co-applicants you’re permitted to have.

The Bottom Line: Choose Your Co-Applicant Carefully

A co-applicant can increase your chances of getting approved for a loan, but it can also hurt your chances depending on the person you choose. Since both applicants’ credit scores and income are evaluated when you apply, you need to be extremely careful with who you choose as a co-borrower. Make sure you pick someone you’re comfortable with having equal stake in your property, and ultimately someone you trust.

To take control of your finances and improve your chances of getting a mortgage, sign up with Rocket Money.