4 min read interest rates

Does having 2 borrowers on an application get me a better interest rate vs applying solo?

Does having 2 borrowers on an application get me a better interest rate vs applying solo?

Shorter Answer:

No, having more borrowers on an application doesn't get you a better interest rate. In some instances, having more borrowers might get you a worse interest rate depending upon the credit scores of the borrowers.

Longer Answer:

When applying for a mortgage, many people believe that having more borrowers on the application can get you a better interest rate compared to applying solo. Unfortunatly, this is a myth. Having two or more borrowers does not inherently get you a better interest rate vs applying solo.

What determines an Interest Rate?

Interest rates are primarily determined by the following factors:

  1. Credit Scores: One of the main facotrs that determines an interest rate is credit scores. Typically, lenders will use the lowe
  2. Loan-to-Value Ratio (LTV): This is the ratio of the loan amount to the appraised value of the property. A lower LTV ratio can result in a better interest rate, but this is independent of the number of borrowers.
  3. When applying for a mortgage, a common question is whether having two borrowers on the application can secure a better interest rate compared to applying solo. The straightforward answer is: No, having two borrowers does not inherently get you a better interest rate.

What Are Interest Rate Determinants?

Interest rates are primarily determined by the following factors:

  1. Credit Scores: Lenders use the credit scores of the applicants to assess risk. Typically, the lower of the two credit scores is used to determine the interest rate. This means that if one borrower has a lower credit score, it could negatively impact the interest rate offered.
  2. Loan-to-Value Ratio (LTV): This is the ratio of the loan amount to the appraised value of the property. A lower LTV ratio can result in a better interest rate, but this is independent of the number of borrowers.
  3. Type of Property: In some instances, buying a condo or a co-op might get you a higher interest rate vs a single family home or townhouse/rowhouse.
  4. Length of Mortgage: Many times mortgages with a longer term have worse interest rates vs shorter term. For exmaple, a 30 year fixed mortgage might have a higher rate than a 15 year fixed mortgage.
  5. Market Conditions: Interest rates fluctuate based on broader economic conditions and market trends, which are not influenced by the number of borrowers on an application.

What are Misconceptions About Multiple Borrowers?

There is a common misconception that having two borrowers can lead to a better interest rate due to combined incomes and perceived financial stability. However, lenders focus on individual creditworthiness rather than the number of borrowers. Here’s why:

  • Credit Score Impact: As mentioned, the lower middle credit score of the two borrowers is typically used. Therefore, if one borrower has a poor credit score, it can result in a higher interest rate.

Example Scenario

Consider two scenarios:

  1. Single Borrower:
    • Middle Credit Score: 750
    • Interest Rate: 6.5%
  2. Two Borrowers:
    • Borrower A Middle Credit Score: 750
    • Borrower B Middle Credit Score: 650
    • Interest Rate: Likely higher than 6.5% due to the lower credit score of Borrower B.

In this example, the presence of a second borrower with a lower credit score results in a higher interest rate, demonstrating that having two borrowers does not automatically lead to a better rate.

  • Income Requirements: While combined incomes can improve the debt-to-income (DTI) ratio and overall loan qualification, to much qualifying income could disqualify borrowers from homebuying programs. Some programs that offer lower interest rates have maximum qualifying income requirements. Therefore, two borrowers applying might not qualify for a program due to their income; while one borrower's income might be under the maximum amount for the program. For example, Fannie Mae and Freddie Mac both have programs (HomeReady and HomePossible) that offer lower interest rates if the borrower(s) are under 80% of the annual median income of the area they are purchasing a home in.

What is the Impact on Mortgage Insurance with having Multiple Borrowers?

While having two borrowers does not directly affect the interest rate, it can have a positive impact on mortgage insurance. Mortgage insurance is typically required when the down payment is less than 20% of the home's purchase price. Here’s how having two borrowers can help:

  • Improved DTI Ratio: A better debt-to-income ratio due to combined incomes can make the overall loan profile more attractive, potentially leading to lower mortgage insurance premiums.
  • Shared Financial Responsibility: Mortgage insurers may view the loan as less risky with two borrowers sharing the financial responsibility, which can sometimes result in more favorable mortgage insurance terms.

Conclusion

In conclusion, the number of borrowers on a mortgage application does not directly affect the interest rate. The interest rate is primarily determined by the credit scores, loan to value, terms of mortgage etc. While having two borrowers can improve loan qualification metrics like DTI ratio and potentially lower mortgage insurance costs, it does not inherently secure a better interest rate, but may get a lower mortgage insurance rate on Conventional mortgages.

Have additional questions about having one or two borrowers on an application, I am happy to answer them. Reach out to me at teamjd@mainstreethl.com

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This blog is for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.

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