My partner and I are buying a place, and we would get a better rate if we don’t include my income because I am self-employed. So I won’t be on the mortgage, but I will be an owner. What are the pros and cons of this arrangement?
Yes, depending on your employment situation, this may lead to more favorable loan conditions for your mortgage, our experts say.
New Yorkers who are self-employed—whether they are small business owners or 1099 contractors—are having a harder time getting loans amid the economic disruption caused by the pandemic. So if your partner has a steadier job and income, it may be better for them to sign onto the mortgage alone.
Mortgage rates are determined based on loan-to-value ratio—that is, the mortgage amount in proportion to the estimated value of the property—and the credit scores of the borrowers. Based on this, your partner's finances and credit may net you a better rate than if both of you signed on.
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Lenders also consider debt-to-income ratio, so if you have a lot of debt (whether from student loans, credit cards, or other sources), that could be another compelling reason to stay off the mortgage.
"Any documented income on the loan application is used, as this effects the debt to income of the loan qualifications," says Brittney Baldwin, a vice president and loan officer with National Cooperative Bank (a Brick sponsor). "If a borrower is newly self-employed or the income is not stable at the moment, then the borrower with the stable income may have the higher chance of loan qualifications."
However, many self-employed people can get good rates on mortgages, provided their tax returns don't show losses, and they have good credit and little debt.
"There are plenty of banks that will offer you the same rate if you are self-employed," says Melissa Cohn, an executive mortgage banker with William Raveis Mortgage. And there are drawbacks to not signing onto the mortgage, she notes. "You don’t get any mortgage deductions for tax purposes. Only those on the loan itself qualify to take the deduction. You also don’t get the mortgage on your credit to build good credit if you don’t have a strong history."
On the plus side, you can still be considered a co-owner of a property even if you're not named on the mortgage.
"Lenders can consider an application with a borrower on the loan and additional title holders," Baldwin says.
Having your name on the title makes you one of the owners, but keep in mind that your partner will be considered the only one legally responsible for making mortgage payments. This could be a bit risky for them.
"For your partner, the con is that if for some reason you were to break up. they would be on the hook 100 percent for the mortgage and the payments," Cohn points out.
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