What is a co-borrower?
A co-borrower is a person who takes out a real estate or consumer credit in tandem with another person, making both parties “co-borrowers”. The two co-borrowers are responsible for the condition of the creditor’s contract, mainly the repayment of the credit borrowed. Often times the co-borrower is a borrower’s spouse or another family member.
An Easier Loan To Get
Before providing you a loan, the bank will assess the borrower’s capacity to make good on his or her loan obligations. The credit a borrower is granted will be in line with his/her ability to repay the borrowed funds, generally depending on the level of income. Co-borrowers taking out a loan together have a greater borrowing capacity than on his/her own.
One of the two most common reasons for taking a loan out with a co-borrower is when two people (married, cohabitating, etc.) choose to purchase a property and share the responsibilities of repaying the loan together. The other common reason for co-borrowing is the borrower having a hard time obtaining credit, and getting help from a family member or a friend.
How To Find A Co-Borrower?
A co-borrower must be someone you trust (family member, spouse, friend, etc.), someone you can count on, and someone who will make a commitment to pay his/her share of the monthly loan payment.
Who Can Be A Co-Borrower?
Any tax paying adult who resides in the U.S. can qualify as a co-borrower. Before granting any loans or line of credit however, the bank will carefully study your financial situation as well as your co-borrower’s financial standing. This includes looking into both incomes, outstanding loans, file at the bank, etc.
This means that the co-borrower must be approved by the lending institution from which the loan is sought to be borrowed. Both of the co-borrowers must also be able to grant the bank any supporting documents that are requested. At that point, the bank will make the determination if the two parties can be the co-borrowers of the loan.
Not all banks evaluate their potential loan borrowers in the same manner. Each financial institution has its own methods by which they calculate borrower solvency. The bank is going to be fronting a lot of money on the co-borrowers’ behalf and needs to know that both parties are in a financial state where they can, over time, repay that loan. It is therefore encouraged that you apply for loans at multiple institutions to increase the chances of getting a loan.
What Happens In Case Of A Non-Payment?
Both co-borrowers are held to the same standard when they jointly receive a loan. In the case of a non-payment, the bank may require each of the parties to repay the loan in full. Neither co-borrower has any legal standing or protection if the other co-borrower defaults. If neither of the co-borrowers can make the monthly payment the bank can block both accounts apply for an attachment of wages and/or property, or request a banking ban for you both.
How To “Break” With A Co-Borrower?
It is possible to dissolve the co-borrower partnership, but the terms and conditions vary based on the type of loan in question.
In the case of a real estate loan, when the co-borrowers are a couple, the “breaking” usually is a result of a divorce. There are three possible scenarios in how this “break” occurs:
- One co-borrower keeps the property. After a request for separation is formally filed, the bank will transfer the entire debt sum to the borrower who is keeping the property, and cancel the other co-borrowers guarantee. Before doing so, however, the bank will once again evaluate the solvency of the remaining borrower. If that borrower is not estimated to be able to pay off the loan solo, the bank may not accept the new credit agreement.
- Another co-borrower replaces the former co-borrower and assumes the responsibilities of one, pending the bank’s agreement.
- The loan is repaid in full. Often times this is done by selling the property.
In the case of a consumer credit scenario:
- Co-borrowers of the home loan will reach an amicable agreement among themselves and continue to repay the loan in order not to risk one of the other falling into further debt.
- Auto-loans are more complicated than home loans with this regard. Because the registration certificate does not constitute as an ownership deed, the co-borrowers will need to work out an amicable solution of repayment.