A mortgage lender will allow more than one name on a mortgage loan. Applying with a co-borrower helps you qualify for a higher amount because the other person shares the mortgage responsibility with you. This means, if the mortgage isn't paid, this affects both credit scores. You can add a co-borrower when applying for the original loan, but once you've acquired a mortgage loan, there are specific rules for adding a co-borrower.
Reasons to Add a Co-Borrower
If you want to give someone a legal stake in your home, such as a spouse, a parent or a child, you don't have to add this person as a co-borrower on the mortgage. Instead, you can add the person to your mortgage deed by contacting your title company and paying the required fee, but certain situations may warrant adding a co-borrower to your mortgage loan.
If you marry or add someone to your deed, the person may agree to pay all or a portion of your home loan. This is a verbal agreement between you and the other person, but if his name isn't on the mortgage loan, he isn't obligated to uphold the agreement. By adding this person's name to the mortgage, he becomes liable for the debt, thus more likely to uphold the payment agreement.
Refinancing is Required to Add a Co-Borrower
Adding a co-borrower to a mortgage loan isn't as simple as calling your mortgage company and making a request, and you can't add a co-borrower without refinancing the mortgage. A refinance allows you to change the original terms of your home loan. The changes can include the interest rate, the pay-off date, the monthly payment and the names on the mortgage. With a refinance, you can add someone's name to the mortgage, as well as take someone's name off the mortgage.
To refinance your mortgage loan and add a co-borrower, complete and submit a new mortgage loan application. You can apply with your current lender or start over with a new lender, but you aren't guaranteed a mortgage approval. With a refinancing, the lender re-evaluates your situation, and then considers the situation of your co-borrower if you are adding one. This includes employment status, credit scores and existing debt balances. In addition, the property must qualify for a refinancing. As a rule, you need at least 20 percent equity for a conventional refinance and 5 percent equity for an FHA refinance.
Before refinancing your mortgage to add a co-borrower, consider the financial aspects of taking out a new loan. Costs associated with refinancing include a home appraisal and closing costs. Closing costs are between 3 and 5 percent of the loan balance, and paid on the day of closing. Some lenders will let you finance the closing costs into your loan balance, but this increases your mortgage balance, as well as your monthly payment.