November 4, 2016
Whether the clients in front of you are married, in a relationship, related, or just partnering to afford a home doesn't really change things from your perspective. As an experienced Loan Officer, you still look for the best, most affordable way for them to access the credit they need based on their application. Your clients, however, may need help understanding how the way they apply can potentially impact the results of the analysis you do and, ultimately, the cost of their loan.
What Clients Should Know Before Applying
When working with unmarried home loan applicants, it's important to understand the motivations behind the application to help them determine if taking a different approach would be more beneficial.
Here are six things you may want to clarify for your unmarried borrowers to help them avoid undermining their overall objectives when applying jointly.
- Confusing cohabiting with co-borrowing. Clients simply assume they need a co-borrower to get a loan or that if they are buying a home as an unmarried couple, they need to apply for a mortgage as co-borrowers. Knowing they don't, that they can borrow as singles, could change their application strategy.
- Sometimes, two incomes are not better than one. Combining finances for an application is often done to qualify for a larger loan based on the higher total income level or to be more appealing to the lender. As you know, co-borrowing does provide a second source of repayment, and it typically boosts the overall debt-to-income ratio, possibly allowing you to offer your borrowers a better rate. This is not the case when that extra income comes with more debt, making the loan terms less attractive, in spite of the higher combined income.
- Credit scores aren't averaged. Similarly, many clients don't realize that while income and assets are combined for a mortgage review, credit scores are not. Where clients have mismatched credit scores, with one partner having a substantially better score, they may not realize that you will be evaluating the application using the lower score. In this case, you may want to suggest that they consider waiting to borrow until the partner with the lower score takes action to improve it. The other possibility is to see if the partner with the higher score would be able and willing to apply on their own and still qualify for the loan.
- Co-borrowing is different from co-signing. Another misconception around co-borrowing arises with family members. Often, a parent wants to help a child make a home purchase by lending their income and credit history. However, the parent won't actually be living in the home. Here, it may make more sense to have that parent co-sign the loan, rather than serve as a co-borrower, since that may more accurately reflect ownership of the property. A co-borrower is a joint owner, while a co-signer is just agreeing to be held responsible for the repayment of the mortgage.
- Borrowing with a friend can lead to a higher down payment. Having a nonfamily co-applicant who is not going to occupy the property can conceivably impact the loan-to-value ratio, as in the case of FHA loans. Instead of qualifying for the low down payment amount of 3.5 percent, 25 percent could be required.
- Co-borrowing isn't the same as co-owning. While borrowing together creates a joint liability, ownership of the underlying property is determined by how the title to that property is held. If the co-borrowers were to split up, they are both liable for the full amount of the loan even if the property is owned in only one name.
Laws Around Ownership Favor the Married
Unmarried clients may also not realize that the body of property law, which was written with married couples in mind, creates a slightly more complicated transaction for them. While your focus is on making sure your clients, regardless of their relationship status, will be comfortable repaying under the terms of their mortgage, unmarried clients may need to take a few extra steps outside of the loan process to ensure they are protecting and defining their own legal rights.
Typically, unmarried borrowers are best advised to have a legal professional draw up a cohabitation agreement to address their rights and responsibilities and to determine how the property is to be handled should the relationship or partnership end.