WHO IS A BORROWER AND WHO IS A TITLE HOLDER
When applying for a mortgage one of the first decisions to be made by the applicant(s) is who will be on the loan and who will be on the title (i.e. owner). At first blush this seems like a simple question, however there legal, financial, lifestyle, and potentially estate planning issues that are implicated.
Who is an Eligible Borrower?
A borrower is defined as any applicant (individually or jointly) whose credit is used to qualify for the mortgage. Co-borrower is used to describe any borrower other than the borrower whose name appears first on the note.
In addition to borrowers and co-borrowers, a mortgage application may have a guarantor or a co-signor. They are defined as credit applicants who 1) do not have an ownership interest in the property; 2) sign the mortgage or deed of trust; 3) have joint liability and 4) do not have an interest in the transaction. In other words, they are on the mortgage but are not on title to the property.
There is not a limit to the number of borrowers, co-borrowers, co-signers or guarantors that can be on a mortgage. Although not common, certain types of mortgages will allow for entities such as a LLC, partnership or corporation to be a borrower on a mortgage. Typically, these are for investment properties on portfolio mortgages (not Conventional, FHA or VA).
Who Lives in the Property? Technically if the property is an investment property, none of the borrowers or title holders live in the property. However, for a primary residence transaction, at least one of the borrowers must live in the house being financed. The co-borrowers and co-signers are not required to live in the property.
Who Owns the Property? Ownership of real estate is determined by who is listed on the title to the property. The question of who is eligible to be on the title to property is much more expansive than who can be a borrower on a mortgage. Additionally, the borrowers on a mortgage are not required to be on the mortgage at its inception. Similarly, there can be people listed on title to a property that has a mortgage that are not on the mortgage as borrower, co-borrower or a co-signer. Additionally, certain types of mortgages will allow for entities such as an LLC, partnership or corporation to be on the title to property. Furthermore, subject to complying with the terms of the mortgage and the deed of trust, title holders can be added to the title or removed from the title of a property at any time.
The way title is held can vary based on state law and the legal and financial objectives. In the state of Colorado, title to property can be held as follows:
Real Life Considerations
Who becomes a borrower on a mortgage is often dependent upon the requirements to qualify for the mortgage. Typically, with married couples if one of the partners has a significantly worse credit score, they will be removed as a borrower but will remain as a title holder. Similarly, if a borrower cannot qualify on their own, they often will add a non-occupant co-borrower or co-signer, such as a parent. The person added does not have to be on the title of the property.
However, the following areas will often impact the decisions about who should be on the mortgage and who should be on the title of a property that is being financed:
Family law considerations;
Long-term care planning
Investment and wealth management planning
Credit planning and management
The answer of who is a borrower and who is a title holder is typically easy when the borrowers are married (most hold title as joint tenants with the rights of survivorship). However, in any situation where the borrowers are not married, careful consideration should be given to the issues of borrower and title holder designations in consultation with the appropriate financial and legal advisors.
Soon the real estate market will enter what is generally considered the prime home buying/selling season, which is March through September. In the Denver metro area inventories are tight, and it continues to be a seller’s market. Despite it being a seller’s market, in many ways it is still a very advantageous time to buy due to the following factors:
There is a lot of competition to find and buy the house you want. This is true for all buyers, not just first-time buyers. So unless you are in a position to pay all cash there are some specific recommendations that can help you gain an advantage over other buyers.
Get pre-qualified early. It is never too early to talk to a lender about the mortgage options that are available and to address any areas that can be improved or need to be addressed prior to the time you will actually start looking. This not only applies in situations where the credit score may be low, but also is beneficial for someone who may have a credit score of 700 and could get a better interest rate if their score were 720. By starting early, you can put yourself in the best position.
Starting earlier will also allow you to determine the mortgage amount and monthly payment that are comfortable given your financial situation. You will also get valuable information all the different types of loans that are available and the amount of cash that will be required to purchase a home.
By taking these steps early, when you are ready to start seriously shopping, you will save a tremendous amount of time by knowing what your requirements are, what you can and cannot do, and you will be in a position to make the strongest offer possible.
Author, Wayne Tucker
As many of you know in my former life as a CPA, I was a tax partner at a large accounting firm. In this role, for 20 years, I paid very close attention to the changes in the tax law and how they affected my corporate and business clients. So, I was particularly interested in the tax reform that was signed into law in December and how they will impact my mortgage clients.
It is not an understatement to say that the tax bill signed in December is the most significant change to the Internal Revenue Code since the Tax Reform Act of 1986. In many ways, it is a structural change that eliminates a lot of personal and business deductions (i.e. legal loopholes) in exchange for lower overall tax rates. It also significantly impacts investment in the U.S., repatriation of earnings held outside of the country by companies such as Apple, Google, Amazon and many others (estimated to be as high as $4 trillion dollars). Surprisingly, it also impacts the real estate and the mortgage industry in a significant way.
Following are the four areas of the tax bill that will have the largest impact on owners of real estate.
The change that may lead to the most activity in 2018, is that many people who have HELOC’s in place should evaluate whether it makes sense to consolidate their HELOC with the first mortgage before interest rates start to rise (see the interest rate outlook in the article in this issue that looks forward to 2018).
The second thing I would encourage everyone to do, is to have their tax preparer, as part of the preparation of the 2017 tax return, prepare an analysis of how their tax situation will be impacted in 2018 by the new tax law.
Each of the provisions outlined above, will result in a significant amount of deductions being lost by homeowners. Additionally, there are many other changes that will likely affect that tax situation of many people in addition to the 4 items outlined above. The good news, is that for most people, the reduction in the tax rate will offset the loss of the deductions.