Essential Joint Loan Facts
More Borrowers Strengthen an Application
A joint loan is a loan made to two or more borrowers. All borrowers are equally responsible for repaying the loan, and borrowers usually have an ownership interest in assets that are bought with the loan proceeds. Applying jointly can increase 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 often the primary reason for applying for a loan jointly.
Lenders compare how much borrowers earn each month to the required monthly payments on a loan. Ideally, the payments will only eat up a small portion of your monthly income (lenders calculate a debt to income ratio to decide). When 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 strong credit. Lenders prefer to lend to borrowers with a long history of borrowing and repaying (on time). If you can add a strong credit score to your loan application, you have a better chance of getting approved.
More assets: joint borrowers can also bring assets to the table. They might provide additional cash for a larger down payment (and lenders might discourage “gifts” from non-borrowers, especially for mortgage loans), or they might pledge collateral that they own to help secure a loan.
Joint ownership: in some cases, it just makes sense to borrowers to apply jointly.
For example, a married couple might view all assets (and debts) as joint items. 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 (as are you) for repayment, and banks feel more comfortable if there’s somebody else 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 property you buy with loan proceeds. With a joint loan, every borrower is most likely (but not always) an 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 applying 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 hunt a little more 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, be sure to put agreements in writing before buying expensive property. 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. Informal separations can drag on longer and be more difficult if you don’t have clear agreements in place.
Is a Joint Loan Necessary?
Remember that the main benefit of a joint loan is that it’s easier to qualify for loans when by combining income and adding strong credit scores. 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 one person is named on the loan. You might even be able to put everybody’s name on a deed of ownership — even if one of the owners does apply for a loan.
Of course, it may be impossible for one person to qualify for a large loan. Home loans, for example, tend to be so large that one person’s income will not satisfy a lender’s desired debt to income ratios.
Lenders might also have problems with non-borrowers making a contribution to the down payment. But a larger down payment can save money in a variety of ways, so it might be worth adding a joint borrower:
- You’ll borrow less, so you’ll pay less in interest
- You’ll have a better loan to value ratio (or a less-risky loan) so you might get better rates
- You might be able to avoid paying private mortgage insurance (PMI)
Responsibility and Ownership
Before deciding to use a joint loan (or not), make sure you understand 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 ownership laws may say that the property goes to the decedent’s estate (and 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 get your name removed. The lender made the loan based on a joint application, and you’re 100 percent responsible for repaying the loan. In most cases, you have to refinance a loan or pay it off to put it behind you. 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).