How a Co-Applicant Can Impact You When Applying for Financial Products
By Dan, a married and kid-less blogger over at dinks.co Read the blog to learn more!
If you’ve applied for or even just thought about applying for a loan, you’re probably familiar with the terms co-applicant and co-signer. Many people think those are interchangeable terms, but they’re actually quite different—and each of them have different purposes, uses, and effects.
While both a co-applicant and co-signer can help you get approved for a loan or even help maximize the amount that you’re approved for, a co-applicant has a few more facets you need to be aware of. Some of those facets can be excellent benefits for you; some, however, might not be.
Why Use a Co-Applicant?
When applying for a loan, a co-applicant is someone who literally applies for the loan with you as an equal partner; in fact, a co-applicant is often called a co-borrower. A co-applicant is distinctly different from a cosigner. This is often seen when couples apply for a mortgage, but can also be used with an auto loan, credit card, or even a personal loan. With a co-borrower, both parties’ credit and income are equally evaluated in order to approve the credit being applied for.
While you might think that adding a co-applicant with great credit can tip the scales in favor of approval even if your credit isn’t good enough, that’s not actually the case. With a mortgage loan, for instance, the underwriter uses the lower applicant’s score; if you’re relying on your co-applicant’s credit score to help you reach the approval threshold, you’ll be sorely disappointed. When it comes to credit scores, co-applicants aren’t the magic key to unlocking loan approvals.
If your co-applicant’s debt-to-income ratio (DTI) is low enough, however, adding them could help your application because it’ll lower your DTI as well. With a co-applicant, their debts and income are figured in with yours, and can lower the application’s overall DTI—leading to a higher chance of approval, or the offering of a better interest rate. On a credit card application, the co-applicant could affect how much of a credit limit is granted, or what interest rate bracket the company puts you in.
When Not to Use a Co-Applicant
It’s not always a good idea to bring a co-applicant on a loan application. If his or her DTI is the same as yours, then they won’t help you. If it’s higher than yours, it might actually hurt your chances of being approved even if you could have qualified for a loan on your own.
For instance, mortgages are shared by married couples. In some cases, one spouse could qualify for the mortgage alone, but they add the other spouse to the loan only to find that the other spouse either has a lower credit score, or a higher DTI. Suddenly the couple no longer qualifies for a mortgage—even though the original applicant could have qualified alone.
In addition, using a co-applicant is also not a good idea if you don’t want them having the benefit of ownership or use of whatever you’re financing—and that’s one of the larger differences between co-signers and co-applicants. This is a particularly prevalent concern if the debt is secured by an asset.
While a co-signer essentially agrees to make the loan payments if you default, they don’t have any special rights to the property that’s securing the loan. A co-applicant, however, will have equal footing on the loan; a co-applied mortgage, for instance, means that both parties own the house and have right of residence there. A co-applicant on a credit card or line of credit means the other party can max out the card or use all the available credit and you’ll be held equally responsible—even if you didn’t use the credit or benefit from it in any way. If you can’t trust the person you’re applying with, you might want to think twice.
Once you’ve been approved for a loan, credit card, or line of credit with a co-applicant, you’re both on the hook for payments. If your co-applicant decides that they don’t care about their credit rating, or finds themselves in a financial emergency where they’re unable to pay, you’ll be stuck paying 100% of that loan back on your own, no matter how the loan proceeds or credit was spent.
Having a co-applicant can be a great thing, and can result in being approved for a larger house, nicer car, a bigger credit card limit, or a more robust line of credit. It’s important, however, to ensure that you not only choose the right co-applicant for your situation, but that you know exactly what they bring to the table. Bringing the wrong person—or the wrong credit history—can end up harming you in the long run.