Adding or removing someone from a loan is most often associated with first-time homebuyers or those who have gone through a major life change such as a divorce. Not many people know they have the flexibility to do this, and if you’re not talking to an experienced loan officer, you may end up paying too high of a rate or worse…not qualifying for a loan.
Interest rates are based on the lowest middle of three credit scores for any borrower(s) on a loan application. Periodically I see borrowers on a joint loan application with a large difference of credit scores. Most often, these occurrences are with first-time buyers and/or newly married couples.
If one borrower has a 760 score and the other has a 670 score, the 670 score is used for rate pricing. Depending on the type of loan, this credit score difference could equate a .5 percent rate increase. This situation presents an opportunity to try to qualify the loan with only the borrower that has the 760. Removing a borrower from the loan doesn’t change the way the property will be titled nor does it prevent the person removed from being released of any liability should something happen to the primary borrower. Removing a borrower simply removes the lower credit score from being used when rate pricing. However, removing a borrower will also remove that person’s income from the loan qualifying equation, so it’s important to talk to your loan officer about your particular situation.
Different types of loans have varying degrees of credit score impact. Government loans (FHA, VA and USDA) are barely affected on a credit score range unless one of the scores used is under 620. Conventional loans are those most affected by score differences.
Let’s switch to the other side. Some borrowers don’t have the luxury of removing someone from a loan but instead need to add someone to help qualify. In situations like these, a non-occupying borrower can come into play. This means a person agrees to be on the loan without actually living in the home being financed. This can be also known as co-signing for the loan.
In most situations involving adding a non-occupying borrower, it’s a parent being added to a loan application. Other common situations include when a borrower is recently divorced or widowed and a family member is added. In either of these situations, there is most likely a significant income loss thus prompting the need for more qualifying power.
Non-occupying borrowers are fully liable for the loan, but they also have an equal ownership interest in the property. The loan will show up on their credit report, too, as a liability. The word of caution here is that if a non-occupying borrower is considering buying a new home of their own, the debt-to-income ratios will be impacted by the loan they co-signed for.
No two loan situations are ever the same. Talking to the right loan professional is key to making sure you minimize your rate expense when the opportunity presents itself or to create qualifying solutions when needed. Call our mortgage experts at Fountain Mortgage today to discuss either of these scenarios or learn more about how you can become home-buyer ready.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268