Co-Mortgagor

What Is a Co-Mortgagor?

When taking out a mortgage to purchase a home, it's possible to have more than one borrower listed on the loan. A co-mortgagor shares in the repayment obligation and ownership of a property. They are also a co-owner of the property following the closing of the loan. Adding a co-mortgagor or becoming one can create certain financial and legal obligations for all parties involved.

Legal Status of Co-Mortgagee

A co-mortgagor is a loan participant who shares in the liability for full repayment of a loan. A co-mortgagor can be a relative or business partner of the primary borrower and has the same rights and responsibilities as the other party.

Generally, an individual applicant brings in a co-mortgagor to improve the application or allow them to apply for a larger loan. When approving the loan, lenders can look at each co-mortgagor's income, assets, and debt for underwriting purposes and for calculating their debt-to-income ratios.

A lender may be happy to involve a co-mortgagor in the loan transaction because the second borrower lowers default risk to the lender. The co-mortgagor also bears responsibility for repayment if the original applicant is unable to make payments. In exchange, the co-mortgagor enjoys partial ownership of the property and has limited resale rights.

Cosigner vs. Co-Mortgagor

A cosigner acts as a safety net for the primary owner of a property in the event that that individual is unable to make payments. Typically, a cosigner becomes involved when the primary applicant for a loan has little or questionable credit history. The cosigner does not have any ownership stake in the property after closing and generally does not participate in normal monthly payments unless the borrower proves unable to make payments.

If the borrower does stop paying, the bank will approach the cosigner for the resolution of the debt. When considering the application, the lender will focus more on the credit rating of the cosigner because that person’s ability to pay will be the ultimate impediment to default. The cosigner’s credit score is also at risk in the event that the loan falls through.

A co-mortgagor also partakes in the loan to help an otherwise imperfectly qualified applicant obtain a mortgage. Instead of serving as a stopgap against default, the co-mortgagor is a full participant in the application process and may contribute to regular monthly payments. As equal participants in the mortgage transaction, the co-mortgagors are entitled to some legal protection as if they were one individual. For example, if one borrower declares bankruptcy, the other is protected against creditors regardless of their financial status.

The classic example of a cosigner is a parent helping an adult child purchase their first property. The parent is involved to vouch for the child and lessen the risk for the lender, but not to make payments. On the other hand, the most common scenario for a co-mortgagor relationship is spouses purchasing a property together. Business partners would go through a similar process. By applying together, the applicants can generally qualify for a larger loan.

Do I Need a Co-Mortgagor?

Having a co-mortgagor, cosigner, or co-borrower is not necessarily a requirement to get a mortgage. But there may be some scenarios in which it makes sense to have a co-mortgagor. For example, if you're buying a home with your spouse, then you may want to add them as a co-mortgagor to protect their ownership interest in the property. Having your spouse listed as a co-mortgagor could also help you secure lower interest rates or more favorite repayment terms for the loan.

You may also choose a co-mortgagor arrangement if you're buying property with a business partner. Having both of your names on the mortgage means you're both financially and legally responsible for the debt and also share in the property's ownership.

Risks of Becoming a Co-Mortgagor

Becoming a co-mortgagor can be risky if the relationship goes south or if the other borrower passes away. Say you purchase a home as a co-mortgagor with your spouse and later decide to divorce. That may lead to disputes or disagreements over who gets to retain ownership of the home after the divorce is final. One of you may be forced to buy out the other and meanwhile, the person who gets the home may also be left with the associated mortgage debt.

It's also possible that being a co-mortgagor could lead to other financial issues if you and your spouse or the person with whom you hold the mortgage are unable to make good on the payments. Paying late can trigger late payment fees and damage your credit scores. If you're continually missing payments, that could prompt the lender to foreclose, which could harm your credit scores even further.

FAQs