How Does a Co-Applicant Help When Getting a Loan?

Spouses are often co-applicants for mortgages.

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A co-applicant is someone who applies for a loan with you. Usually it's a family member, such as a spouse, or a father applying with an unmarried son or daughter. A co-applicant also can be a business partner if both parties will own the property bought with the loan. Having a co-applicant increases your chances of approval and of getting a low interest rate.

Improved Creditworthiness

Even though your credit score is just a number, lenders place a large emphasis on it because it predicts how likely you would be to default on the loan. If your own credit score is low, or if your co-applicant's credit score is high, having a co-applicant makes your application stronger overall and increases your chances of approval.

Lower Interest Rate

Even if you'd be likely to be approved on your own merits, a co-applicant can help you get a lower interest rate on the mortgage. Lenders reserve the lowest interest rates for loans that pose the smallest risk of default. By adding another creditworthy borrower to your application, you lower the bank's risk. The bank might reward you with a lower interest rate than you'd pay if you were the only one applying for the loan.

Higher Income

A co-applicant's income is included when determining how much of a loan the bank thinks you can afford. Adding a co-applicant might mean that the person's income is added to yours when the bank considers how much to lend you. For example, say the bank doesn't want payments to exceed 25 percent of your monthly income. If you have a monthly income of $4,000, your maximum monthly payment is $1,000. But if your spouse brings home another $4,000 per month and becomes a co-applicant, your maximum monthly payment goes up to $2,000.

Legal Requirements

In some cases a co-applicant is required on loans, so applying without one means you'd automatically be denied. Typically, if you're applying for a secured loan, such as a mortgage, any co-owner of the property must be a co-applicant. For example, if you and your spouse are buying a house, you must apply together for the mortgage. Similarly, if you and a business partner are buying a store, you both must apply.