If you are planning to buy a home soon and only have enough money for a reservation fee or a deposit, a home loan may be in your immediate future. And if you’re getting a home for your family, you’re under even greater pressure to save money when you invest in your home in Nuvali, for example.
In such circumstances, you’re likely to resort to co-borrowing (or co-applying) for a loan with another qualified borrower, or co-signing your home loan application with a person who can guarantee your ability to pay. But what’s the difference between these two home loan types? Read more to find out which one is the best in your situation.
|Primary borrower passed standard loan qualifications||Yes||Not necessary|
|Second person processed by lender for financial credibility||Yes||No|
|Primary borrower undergoes guarantee process by second person||Not necessary||Yes|
|Share in property ownership||Yes||No|
|Share in loan liability||Yes||Yes|
|Guarantee payment in case of default||Yes||Yes|
|Regular amortization payments||Yes||No|
The Lowdown on Co-Borrowing
When you qualify for a home loan with a co-borrower, you have someone to share the loan – and its obligations – with you. In the home application papers, your co-borrower is listed as a co-applicant. Once the loan gets approved by the lender, the co-applicant officially becomes the co-borrower.
Here are six more things to know when you decide to get a home loan with a co-borrower:
1. Your co-borrower goes through the same standard qualification process as a primary borrower. The lender will need to verify both lenders’ ability to pay. In some cases, they will assess your combined family income. They will also check your other loans and obligations, income stability, occupation tenure, number of dependents and the rest of your credit history.
2. You still need to pass the standard qualification process. Unlike in a home loan with a co-signer (more on that later), you need to provide documentation that you have the capability to pay for your home loan.
3. In most cases, co-borrowers don’t need to go through a guarantee process. It can be all too common in Filipino culture that some of your family members would want to share the burden of paying off the mortgage. Because both you and your co-borrower elect to apply for a home loan together, it may be unnecessary for you to check each other’s credibility to pay.
4. Your co-borrower has an ownership share in the property, and have legal rights to it too. As co-borrowers, both your names will be registered to the property once you have fully paid for the home loan and the property title is to be turned over.
5. Your co-borrower shares in the loan liability. As co-borrowers, you are in it together when repaying your home loan. This means that aside from you, the co-borrower is also willing to take on the full financial burden.
6. Your co-borrower shares in the amortization payments. The exact percentage or share of the full loan each has to pay may or may not be stipulated in the home loan contract, but both share the responsibility in making sure the liability is paid in full every month until the end of the home loan term.
Risks of Co-Borrowing
Sharing money obligations with another person might sow some discord later on, intentionally or not. Money can be a sensitive topic between spouses, family members and friends—even more so when that relationship is tense or conflicted. When spouses break up, for instance, the home (including whatever home equity earned and loan amount remaining) will be among the first things to be brought up—whether to divvy up or assume the obligation.
There is also that “utang na loob” principle that might not sit well with you; you may feel another long-term obligation, even your co-borrower and yourself are on the best of terms.
Moreover, there may be instances wherein your co-borrower may not be able to cough up their share of the amortization payment. While you are diligent with loan payments, your co-borrower might not be in the same position.
The Deal on Co-Signing
In some cases, lenders will need potential owners to have someone who has better credit or income to help the latter qualify for the home loan. But the main difference between a co-signer from a co-borrower is this: the former will only take the full ownership of the home loan, and nothing else. As the risk of defaulting on the full loan amount is fully shared with the co-signer, there is also the likelihood of getting a lower interest rate depending on his or her credit history.
Here are four more distinctions of the co-signer:
1. Your co-signer may go through a more rigorous qualification process, especially if they are not of familial blood. A co-signer will basically guarantee to the lender that you have the capacity to pay for the long-term loan. Naturally, the lender will need to make sure that the co-signer indeed has the money and the stability to pay if in case you default on the home loan.
2. Your co-signer will request you to go through a guarantee process or a separate contract of their liking. Almost all co-signers will require you to do this because you are trying to build trust. Moreover, your co-signer should be able to trust that you will be able to pay on time to avoid getting penalized.
3. Your co-signer, however, will not have ownership interest, but may request it as collateral against you. As a sign of trust, your co-signer will need to ask something of financial value in return for continuing your amortization payments should you encounter financial difficulties, and sometimes with interest. This may mean signing off your ownership stake in your property.
4. Not everyone can apply for a home loan with a co-signer. Foreigners who have Filipino spouses or borrowers who did not reach the lender’s debt-to-income ratio are suggested to apply with a co-borrower instead. College students who are not in the legal age may apply for a home loan with a parent as a co-signer, but the lender may suggest having the parent as the primary borrower and transfer the property title later to the child.
Risks of Co-Signing
Getting a co-signer or guarantor with good credit standing can be very difficult, especially if the lender requires that person to put up something for collateral. This is because that person will have the responsibility for the entire loan amount, and potential interest, should you decide to default on the loan. It may feel like a double-edged sword for the co-signer to rely on your word to pay when you yourself are being doubted on by the lender in the first place.
Having someone else to contractually support you in your dream to own a home is definitely a great way to save money when you invest in your home in Nuvali. But this kind of agreement comes with additional risks that might turn into an even greater burden. For the co-borrower or co-signer’s part, agreeing to participate in a home loan will also mean putting their own credit rating on the line.
Still confused with our guide? Here’s a simple rule to help you decide:
Get a home loan with a co-borrower if you both share the same goal, which is home ownership.
If you are in need of money and someone you know wants to help, then get a home loan with a co-signer.
It is also a wise idea to have a separate contract that clearly dictates the intention of both parties, along with terms to carry if both do not fulfill their duties. This could lessen the doubt between you and your co-borrower to a minimum, and reduces the obligation as something you mutually agree on under the protection of the law.