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Coborrowers


Definition of "Co-Borrowers"

Bob Bracken
  Comey & Shepherd City

One or more persons who hove signed the note and are equally responsible for repaying the loan. When One Co-Borrower Has Much Better Credit than the Other: A problem that arises frequently with co-borrowers is that one has much better credit than the other. If they buy the house together as co-owners and co-borrowers, the deadbeat's bad credit will result in a bad credit rating for the transaction and a corresponding high interest rate. One option is for 'good-credit' to buy the house alone, leaving 'bad-credit' out of the deal. But then the mortgage would be limited to the amount that the income of 'good-credit' can support. Whether this option works depends on whether the mortgage that 'good-credit' can carry, plus the down payment the partners can make, permit them to purchase the house that they want. If the first option doesn't work, the partners can have 'good credit' buy the house using a program that does not require verification of income. A number of such programs are available with different twists. Then the mortgage amount would not be limited by the income of 'good-credit.' However, programs involving less than full documentation require a higher interest rate, down payment, or both. Still another possibility is to have a third party with good credit and income replace 'bad-credit' as the co-borrower. Usually only a parent would be willing to play this role. When Co-Borrowers Split: Problems can arise when co-borrowers split, whether they are married or not. However, difficulties seem to arise more frequently with unmarried couples, perhaps because unmarried couples purchasing a house together more often do it blindly. When they split, issues that should have been foreseen, but weren't, may prevent a clean and amicable separation. Here are the major issues to resolve with your partner before you buy. Split with Sale: There is much to be said for an agreement that the house must be sold if either partner aborts the relationship. This avoids the thorny issues, discussed below, that can arise when one partner stays with the house. If a split leads to a sale, the only issue is how the proceeds are to be divided. Equal shares may or may not be equitable. A partner who pays the down payment, or a larger share of current expenses, deserves a larger share of the proceeds. In some cases, this rule would not be fair. For example, one of the partners might unilaterally work on improving the house, which would call for a higher share. Split with One Partner Staying: The terms of settlement are more complex when one of the partners remains in the house. There is no sale price, so the partners must agree on an appraisal procedure and on who will pay for it. They should also agree on whether a real estate sales commission should be deducted from the valuation used in the settlement. If they wait until the event, this is invariably contentious. Another problem arises if the partner remaining in the house doesn't have the money to pay off the partner who is leaving. The more equity they have in the house, the more cash the resident partner needs to raise. A home equity loan is not possible unless both partners become responsible, which is the last thing the departing partner wants. The largest problem, however, is the departing partner's continuing responsibility for the mortgage. Many departing partners believe that they are off the hook because the partner remaining in the house has agreed to assume full responsibility for the mortgage. They (and often their lawyers) overlook the fact that the lender was not a partner to their agreement. As far as the lender is concerned, the departing partner remains liable. If the departing partner seeks to purchase another house, the old mortgage will show up on his or her credit report, reducing the size of the loan for which he or she can qualify.



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