Shared Loans Explained: Different from Submission of Contract
A joint loan is a loan from two or more borrowers. All borrowers are equally responsible for the repayment of the loan, and the borrowers usually have an ownership interest in the funds purchased with the loan settlement.
Applying together can increase your chances of getting credit approval, but things don’t always work out as planned.
Why are they jointly implemented?
Lenders compare how much borrowers earn each month to the required monthly loan payments. Ideally, paying will only eat a small fraction of your monthly income (they lend to calculate the debt-to-income ratio to decide). When payments are too high, adding a new loan that earns you money can help you get approved.
Better Credit: An additional lender can also help if you have strong credit. Borrowers prefer to borrow borrowers with a long history of borrowing and repayment (on time). If you can add a strong credit score to your credit application, you have a better chance of getting approved.
More funds: Joint borrowers can also lend money to the table. They can provide extra money for larger payments (and lenders can discourage “gifts” from non-borrowers, especially for mortgages), or they can pledge collateral they own to help secure the loan.
Joint ownership: In some cases, it only makes sense for borrowers to apply jointly.
For example, a married couple may see all assets (and debts) as common items. They are in it together, for better or worse.
Joint loan against co-signing
With mutual loans and taking out a loan, another person helps you qualify for a loan. They are responsible (like you) for repayment, and banks feel more comfortable if there is someone else on the hook for a loan.
This is a major similarity: Both co-starters and co-lenders are 100% responsible for the loan. However, joint loans are different from co-signed loans.
Cosigner Rights: The cosigner has responsibilities but generally no rights to the property you purchased with the loan proceeds.
With a joint loan, every borrower is most likely (but not always) to own everything you buy with a loan. Cosigners simply takes all the risks without the benefits of ownership. Cosigners have no right to use the property, benefit from it or make decisions about the property.
The relationship between borrowers can be important when applying for a joint loan. Some lenders issue joint loans to people who are related to each other by blood or marriage. If you want to borrow with someone else, be prepared to hunt a little bit more for an acceptable lender. Some lenders require each unrelated borrower to apply individually – making it difficult to qualify for large loans.
If you are not married to your co-lender, be sure to put the contracts in writing before you buy the expensive property. When people divorce, litigation tends to do a thorough job of sharing assets and responsibilities (though this is not always the case).
Even so, it’s hard to get someone’s name from a mortgage. Informal separations can take longer and be more difficult if you do not have clear agreements.
Is a joint loan necessary?
Remember that the main benefit of a joint loan is that it is easier to qualify for loans when it combines income and adds strong credit scores. You may not need to apply together if one loan beneficiary qualifies individually.
Both of you (or all of you, if there are more than two) can get involved in payments even if one person is named on credit. You may even be able to put each name on the property – even if one of the owners applies for a loan.
Of course, it may be impossible for one person to qualify for a major loan. Home loans, for example, tend to be so large that one person’s income does not meet the desired income debt ratio.
Lenders may also have problems with non-contributing lenders. But greater participation can save you money in different ways, so it may be worth adding a joint borrower:
- You will borrow less so you pay less interest
- You will have better value for money loans (or less risky credit) so you can get better rates
- You may 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 payments?
- Who owns the property?
- How do I get out of credit?
- What if I wanted to sell my share?
- What happens to the property if one of us dies?
It’s never fun to think of anything that can go wrong, but it’s better than surprising it. For example, co-ownership is treated differently depending on the state in which you live and how you own the property.
If you buy a house with a romantic partner, you may both want others to come home at your death – but property laws can tell that property goes into the possession of a decedent (and without valid documents to say otherwise, the deceased family may become your co-owner).
Getting out of credit can also be difficult (if your relationship ends, for example). You can’t just remove yourself from the loan – even if the co-borrower wants to have your name removed.
The lender has made the loan on a joint application basis and you are 100% responsible for paying off the loan. In most cases, you need to refinance the loan or pay it off to leave it behind. A divorce agreement that says one person is responsible for repayment will not cause the loan to be split (or remove any name).