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 natural person who has reached the legal age for a contract to be enforceable;
- An inter vivo revocable trust (there are significant requirements that a trust must meet to be eligible);
- US Citizens and non-US Citizens that have legal status to be in the country and remain in the country; and
- Have a valid Social Security Number or Individual Taxpayer Identification Number.
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:
- Single Person—if a single man or woman is on the deed, they are the sole owner of the property.
- Joint Tenant with Right of Survivorship—this means the owners listed on title equally own the property together. So if one owner passes away their interest in the property is transferred to the other owners by operation of law. This is typically how spouses own property together and how title is held when children are added to the title of their parents’ houses.
- Tenants in Common—each person on the title owns a designated percentage of the property. This percentage ownership will become part of their estate upon death. This is the type of ownership that is typical for investment properties or where the owners are not related.
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.