You can’t always get what you want -- by yourself. A loan with a co-applicant is like a partnership, in which the credit and assets of each applicant count for the loan approval. Co-applicants give the lender two chances to collect on the loan because it can pursue either the applicant or co-applicant for payment. A co-applicant who adds another income might be just what you need to get your loan approved. Don't confuse a co-applicant with a co-signer, however, as the two are quite different.
Co-applicant or Co-signer
A co-applicant applies for the loan with the borrower and has access to the loan proceeds. A co-signer agrees to pay only if the borrower defaults on a loan. The co-signer has no right to the loan proceeds or purchases made with the proceeds. For example, if co-applicants get a car loan and purchase a vehicle, they are both on the loan for payment and likely are both on the title as owners. A car loan with an applicant and co-signer will have only the applicant’s name for payment of the loan. The co-signer won’t see the loan proceeds and the car title won’t show his name.
You’re more likely to meet approval standards for a loan if you apply with a co-applicant. A husband and wife are the usual co-applicants, sometimes called co-borrowers. Finance companies and banks typically want your monthly mortgage payment to be less than 28 percent of your gross income. They also prefer it if the total amount of all your debt payments is less than 31 percent of your gross income. The exact ratios required for approval from one lender to another do vary, however. If you can’t qualify because you have too little income or too much debt, you and a co-applicant may qualify together and your loan application will zip through the process.
Greater Loan Amount
If your income is too low to qualify for the amount of money you’re requesting, you can reduce the loan amount requested or add a co-applicant. A co-applicant with a steady income and few long-term debts can boost the total income calculations so you qualify together. You’ll qualify for a larger loan to buy a more expensive car, house or boat than you can purchase alone.
Some finance companies use risk-based interest rates. These companies consider your assets and credit score to set the interest rate. If you apply for a loan with a strong co-applicant, you'll likely get a lower interest rate than if you apply alone. Question the interest percentage and get the best rate you can. Having a co-applicant and shopping around may save thousands of dollars over the course of a loan.
If you're applying for a mortgage loan, you and your co-applicant may realize tax benefits from being co-borrowers on the loan. Mortgage interest on a residence is deductible on federal income taxes. If you have a co-owner on the title to the property, some lenders require that person to be a co-applicant on the mortgage loan.
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