Co-Borrowing, and How Millennials Can Buy Their First Home

Posted by Casey Losh on Monday, November 27th, 2017 at 3:26pm.

It seems like every week, a new article or report comes out blaming the Millennial generation for the decline of an industry. Millennials have been blamed for falling birth and marriage rates, the financial woes of casual chain restaurants like Applebee's and TGIFridays and even droughts in California because of their love for avocados and almond milk.

Many economists are also quick to point out that far fewer Millennials are buying homes than members of previous generations did at their age. While pundits may like to claim that this is because Millennials hate responsibility, this trend has more to it than a simple desire to avoid needing to maintain a house and yard. In fact, as many as 90 percent of Millennials look at home ownership as a major life goal.

In many areas, Millennials have more education than previous generations, but work longer hours for less pay and fewer benefits. When you look at stagnating wages in even the most educated fields and combine that with skyrocketing home prices in many regions, including Seattle, it's simply impossible for Millennials to purchase a home. Therefore, they just keep on renting, potentially paying more every month than they would pay toward a mortgage.

Financing and Qualifications Keep Millennials Out of Houses

For many would-be Millennial homeowners, building up a down payment and securing financing could be preventing them from home ownership. With rent prices high, the amount a Millennial can save toward a down payment may be very little every month. That could mean years or even decades before would-be Millennial home buyers could save the 20 percent down payment that modern mortgages were built around.

Similarly, more professionals than in previous decades work as contractors for employers who want to avoid tax and benefit obligations. That can mean an extra year or longer before a Millennial can qualify for a mortgage. When you look at starting wages and the six- and seven-figure prices of Seattle homes, it's no wonder that although 42 percent of Millennials want to buy their first home in the next year, many feel like they simply can not.

Co-Borrowing Is the Solution for Millennials Who Want a Home

Instead of waiting for an unknown amount of time to be able to qualify for a mortgage on their own, Millennials may have an alternative option: securing a mortgage with the help of a co-borrower. Co-borrowing, which used to be a relatively rare occurrence in the mortgage world, is now incredibly common. In fact, almost 25 percent of mortgages in the second quarter of 2017 involved non-spousal co-borrowers. Bigger cites, including Seattle, see an even higher percentage of mortgages with co-borrowers on the note.

Co-borrowers are people who co-sign a mortgage for a property. Typically, when talking about a primary residence, the co-borrowers are spouses or partners. These days, however, it is increasingly common for parents or even grandparents to step up and act as a co-borrower to help Millennials obtain a mortgage and move into their first home. A co-borrower will typically accept all the risks and responsibilities that come with getting a mortgage, often solely with the intention of helping a loved one get a home.

Co-Borrowers Assume the Risks Involved in a Mortgage

Co-borrowers are financially responsible for the mortgage, should payments end up missed or late. It also limits their ability to secure other mortgages for themselves, as it increases their monthly debt-to-income ratio and the overall amount they have on credit. It's important for co-borrowers to know the person they are signing with, which is why family members are commonly used. It is also important for these people to obtain some legal protection via an outside contract, which some people are calling the "co-borrower prenup."

Basically, these are contracts that address a worst-case scenario, such as a crash of the housing market or a pending foreclosure on the property. They also address the details of ownership, maintenance and future property transfers. For example, a co-borrower may require that a homeowner share or split the profits from a future sale as compensation for the risk. The contract should also discuss maintenance costs, renovations and taking out any liens against the property for repairs and outline who will live in the home.

Not All Co-Borrowers Are Family

Many Millennials are choosing to forego marriage, choosing to live with a romantic partner and commit without any legal ties. This situation can lead to working with a non-spousal co-borrower to obtain a mortgage. In these situations, a contract outlining what would happen in the event of a breakup is critical. No matter how secure you are in your relationship, you need to know how both equity or possession of the property will be split if your relationship ends.

There is also a third, less common choice, which is to work with an outside company as the co-borrower. There are specialized companies working in roughly a dozen states that provide down payment assistance. Typically, these parties want 35 percent of any equity or profit when the home is sold. For those without romantic partners or family with good credit, these businesses and investors could be the best way to make the transition from renter to homeowner.

Seattle's Housing Market Demands Creativity from Young Buyers

Whether you're thinking of co-borrowing with a family member or buying in a nearby county, Millennials who want to own their own homes in and around Seattle may need to get a little creative to find a house in their price range or qualify for financing.

The good news is that programs to motivate home ownership and cultural awareness of how common co-borrowing has become can make the process simpler for everyone involved.

Leave a Comment