Joint Loans Allow Multiple Borrowers and Owners
Not the Same as Cosigning
A joint loan is a loan made to two or more borrowers. All borrowers are equally responsible for repaying the loan, and every borrower typically has an ownership interest in the property that the loan proceeds go toward. Applying jointly can improve the chances of getting approved for a loan, but things don’t always work out as planned.
Why Apply Jointly?
More income: Increasing the income available to repay a loan is a primary reason for applying for a loan jointly. Lenders evaluate how much borrowers earn each month compared to the required monthly payments on a loan. Ideally, the payments only use up a small portion of your monthly income (lenders calculate a debt to income ratio to decide this). If the payments are too large, adding another income-earning borrower can help you get approved.
Better credit: An additional borrower can also help if she has high credit scores. Lenders prefer to lend to borrowers with a long history of borrowing and repaying on time. If you add a borrower with strong credit to your loan application, you have a better chance of getting approved.
More assets: Joint borrowers can also bring assets to the table. For example, they might provide additional cash for a substantial down payment. That’s particularly helpful when lenders discourage “gifts” from non-borrowers, as with some mortgage loans. An extra borrower might also pledge collateral that they own to help secure a loan.
Joint ownership: In some cases, it just makes sense for borrowers to apply jointly. For example, a married couple might view all assets (and debts) as joint property. They’re in it together, for better or worse.
Joint Loan vs. Co-Signing
With both joint loans and cosigned loans, another person helps you qualify for the loan. They are responsible for repayment (along with the primary borrower), and banks are more willing to lend if there’s an additional borrower or signer on the hook for the loan.
This is the main similarity: Both cosigners and co-borrowers are 100 percent responsible for the loan. However, joint loans are different from co-signed loans.
Cosigner rights: A cosigner has responsibilities, but generally does not have rights to the property you buy with loan proceeds. With a joint loan, every borrower is usually (but not always) a partial owner of whatever you buy with the loan. Cosigners simply take all of the risk without any benefits of ownership. Cosigners do not have the right to use the property, benefit from it, or make decisions regarding the property.
The relationship between borrowers may be important when relevant for a joint loan. Some lenders only issue joint loans to people who are related to each other by blood or marriage. If you want to borrow with somebody else, be prepared to search a little harder for an accommodating lender. Some lenders require each unrelated borrower to apply individually—which makes it harder to qualify for large loans.
If you’re not married to your co-borrower, put agreements in writing before buying expensive property or taking on debt. When people get divorced, court proceedings tend to do a thorough job of dividing assets and responsibilities (although that’s not always the case). Even still, getting somebody’s name off a mortgage is difficult. But informal separations can drag on longer and be more difficult if you don’t have explicit agreements in place.
Is a Joint Loan Necessary?
Remember that the primary benefit of a joint loan is that it’s easier to qualify for loans by combining income and adding strong credit profiles to the application. You may not need to apply jointly if one borrower can qualify individually. Both of you (or all of you, if there are more than two) can pitch in on payments even if only one person officially gets the loan. You still might be able to put everybody’s name on a deed of ownership — even if one of the owners does apply for a loan.
For substantial loans, it may be impossible for an individual to get approved without other borrowers. Home loans, for example, can require payments so large that one person’s income will not satisfy the lender’s desired debt to income ratios. Lenders might also have problems with non-borrowers contributing to the down payment. But a bigger down payment can save money in several ways, so it might be worth adding a joint borrower:
Responsibility and Ownership
Before deciding to use a joint loan (or not), examine what your rights and responsibilities are. Get answers to the following questions:
- Who is responsible for making payments?
- Who owns the property?
- How can I get out of the loan?
- What if I want to sell my share?
- What happens to the property if one of us dies?
It’s never fun to consider everything that can go wrong, but it’s better than being taken by surprise. For example, co-ownership is treated differently depending on the state you live in and how you own the property. If you buy a house with a romantic partner, both of you may want the other to get the home at your death—but local laws may say that the property goes to the decedent’s estate. Without valid documents to say otherwise, the family of the deceased may become your co-owner.
Getting out of a loan can also be difficult (if your relationship ends, for example). You can’t just remove yourself from the loan—even if your co-borrower wants to remove your name. The lender approved the loan based on a joint application, and you’re still 100 percent responsible for repaying the debt. In most cases, you need to refinance a loan or pay it off entirely to put it behind you. Even a divorce agreement that says one person is responsible for repayment will not cause a loan to be split (or get anybody’s name removed).