Why you might need a co-applicant
Tighter mortgage qualification rules and higher-priced real estate mean it's not always easy to qualify on your own.
You might have a great job, a decent income, a good down payment, and perfect credit — and still come up short. When a lender runs the numbers, they might find too much of your income goes toward core homeownership costs: your mortgage payment, property taxes, heating, and condo fees if you're buying a condo.
In plain terms, your debt service ratios are too high. You'll need some extra help to qualify. But you do have options.
Adding another person to your application can give you the boost you need. A co-applicant is someone who applies with you, giving the underwriter an extra profile to consider when deciding whether to approve you for home financing. Here's how to figure out if adding a co-applicant is the right next step.
What is a co-applicant?
A co-applicant is a person who's considered alongside you during underwriting and approval. Lots of loans accept co-applicants — home loans, car loans, commercial property loans, personal loans.
In your case, you're looking at a mortgage. Your co-applicant's income, credit, and financial picture join yours in the lender's math.
Co-borrower vs. co-signer
Terms like 'co-borrower', 'co-applicant', and 'co-signer' sound similar, but there are important differences.
Co-borrowers share equally with you. Both of you take on responsibility for making regular payments, and both have an ownership claim on the house. When you add a co-applicant in a co-borrower arrangement, both parties go on the home's title and both get equal consideration from underwriters.
Co-signers act as a guarantor. They promise to pay back the loan if you can't. A co-applicant's strong credit could make a big difference in the types of mortgages you qualify for if your own credit score is a concern.
If all goes well, a co-signer won't have to do anything after signing the application documents. They don't access the funds, and regular payments are your responsibility. If you default, though, debt collectors can demand that your co-signer pay the debt. Even if you file for bankruptcy, your co-signer may still be on the hook.
What you need to decide with your co-applicant upfront: Who will have access to the funds after approval? Who will be responsible for making payments on time? Being clear from the start helps you both move forward with confidence.
Who can be a co-applicant
Some lenders only let spouses and family be co-applicants. A parent might help their child with their first mortgage, for example, if the child doesn't have a high enough credit score to qualify.
In other cases, you can ask a trusted friend or a business partner to be a co-applicant. Start by checking with your broker to see who can be accepted. Then consider which people in your life have strong credit and financial habits, and who would be willing to help you apply for home financing.
Anyone on the title of your home needs to be added to your funding application as a co-applicant and will add their signature to the final term sheet. In other words, they have an ownership stake in the house alongside you. A spouse, parent, or someone else who has a strong connection to your home and family life might be a good fit.
What makes a good co-applicant?
When you're choosing a co-applicant, you're looking for someone lenders can trust. Typically, that means choosing someone with great credit and a healthy income. Excellent credit tells lenders this is someone who handles debt responsibly. High income signals the co-applicant will have funds on hand if needed.
On a personal level, a good co-applicant is someone you trust, and someone you can talk to openly about money. You need to be able to communicate clearly so you can make a strong financial plan together and adjust it as needed along the way.
Benefits of applying with a co-applicant
There are several major benefits if you have someone willing to be a co-applicant:
1. Increased chance of approval: Having someone else's top-notch credit to back you up means a better chance you'll hear, 'Congratulations! You've been approved.'
2. Lower interest rate: The more favourable your application, the better terms you might be eligible for.
3. Higher max purchase price: In other words, more buying power. An application with two incomes to draw from can afford a more valuable house than one income alone.
4. Potential credit benefits: A history of paying loans on time is a big factor in determining a credit score. Stay on top of payments, and you and your co-applicant may both see your credit scores increase. Keep in mind this benefit depends on your good financial habits. If you don't make payments on time, both of your credit scores could take a hit.
What to expect when applying with a co-applicant
Here's what happens once you get started.
Underwriters look at all applicants' credit scores and credit profiles. Your past experiences with credit play a major role in how future lenders work with you. High credit scores and profiles full of timely payments usually mean you can expect favourable terms.
When you're making any major financial decision, it's best if you can work with a broker who will take you step-by-step through the process. That way, you'll have clear insight to make informed choices.
While you're working on your application, your broker can help you add someone. Need to take someone off the application? They can also help you remove a co-applicant and update your application to review your income only.
After you fill out the application with your co-applicant's contact details, they'll receive an email to complete their part of the application. Later, you'll both need to sign the final closing documents.
What to do next
Co-applicants can help you reach your next big financial milestone if you choose them wisely. Going in on home financing together is a significant decision that will affect both of you for years to come.
The right co-applicant, and the right lender, can partner with you to build a stronger foundation for your next step in homeownership. If you're not sure whether adding someone makes sense for your situation, start the conversation with a broker who can walk you through your options.
