Co-Borrower Vs. Co-Signer: Do You Need One?
When filling out a loan application, you want to appear as credible and trustworthy as possible to lenders. The U.S. Department of Housing and Urban Development (HUD)’s General Guidelines for Analyzing Borrower Credit cites credit history as “the most useful guide to determining a borrower’s attitude toward credit obligations, and predicting a borrower’s future actions.”
In other words, lenders look to your payment patterns to determine their risk in issuing a loan. Mortgage lenders want to make sure you can make monthly payments and pay off your loan over the course of its term. If you appear risky to them, they might charge a higher interest rate as collateral in the case you default on your loan, or they may choose to not lend to you at all. Luckily, a co-borrower or co-signer can send a positive signal to a lender, and both parties can benefit.
What Is A Co-Borrower?
A co-borrower, or co-applicant, agrees to accept equal responsibility for repaying a loan and equal ownership in the investment. In real estate investments, co-borrowers are typically family members or spouses who will share ownership of a property, sign all loan documents and be named on the deed. When a co-borrower doesn’t plan to live on the property, but rather wants to help the primary applicant qualify for a better loan, they’re often called a co-applicant.
Co-borrowers on a mortgage are mainly used when the primary applicant has good enough credit to qualify for a loan, but not good enough to earn a better mortgage rate. Because lenders are required to base loan rates off of the lowest median credit score between both applicants, it wouldn’t make sense to add a co-applicant with a bad credit score. It does, however, make sense to add a co-borrower with a low debt-to-income (DTI) ratio, which can in turn lower the loan application’s DTI average and help the borrowers qualify for a larger principal and lower interest rate.
What Are The Pros And Cons For Co-Applicants?
Whether you’re the primary applicant and considering asking a trusted friend or family member to become a co-borrower, or you’re considering signing on as a co-borrower, there are benefits and considerations for everyone involved.
But first, it’s important to understand that every loan has different requirements. For example:
- VA loans require a DTI of no more than 60%, but all borrowers must be qualified veterans, service members or their spouses.
- FHA loans offer lower credit requirements, but you’ll be required to pay a mortgage insurance premium.
- Conventional loans are more difficult to qualify for, but a large down payment will let you avoid paying those private mortgage insurance fees.
Pros For Primary And Co-Borrowers
Comparing which loan types you qualify for is crucial to understand if and when you’ll need a co-borrower. Here are a few of the benefits of co-borrowing:
- Both applicants will build good credit as payments are made.
- Both applicants will enjoy ownership of the property.
- Adding a co-borrower with lower DTI could help you qualify for a higher principal and lower interest rates.
Cons For Primary And Co-Borrowers
Here are a few of the considerations:
- Co-borrowers are financially responsible for investing upfront and for making regular payments.
- If the primary borrower defaults on a payment, the co-borrower is financially responsible.
- If a co-borrower dies and the remaining borrower isn’t listed as a successor to the deed, they may face housing insecurity.
What Is A Co-Signer?
A co-signer reassures lenders that the loan will be repaid, primarily if the borrower is very young with little to no credit history. A co-signer can leverage their good credit by promising to assume financial responsibility if the applicant can't pay.
Both co-borrowers and co-signers assume fiscal responsibility. Unlike co-borrowers, co-signers are not making any regular payments toward ownership and their name isn’t on the deed.
In terms of responsibility for a mortgage, there is no difference between co-borrower and a co-signer. You name may not be on the deed, but you're still responsible for the mortgage getting paid.
Student loans, first-time apartment leases and car leases or auto loans are the most common examples of when a parent or other family member might co-sign a loan application to help their child obtain assets and build their credit. In real estate, divorcees, self-
What Are The Pros And Cons For A Co-Signer?
Helping a family member receive a lower interest rate may seem attractive to a co-signer, especially if the applicant is a trustworthy young person, and both parties could benefit from co-signing.
Pros For The Borrower And Co-Signer
Here are a few of the benefits:
- As the borrower makes on time payments, both parties might strengthen their credit scores.
- The co-signer doesn’t have to make regular payments.
- The borrower enjoys sole ownership of the property.
Cons For The Borrower And Co-Signer
Here are a few of the considerations:
- If the borrower defaults, the co-signer assumes all financial obligations without any rights to the deed.
- If the borrower defaults on the loan, the co-signer’s credit score and cash reserves may suffer.
When Does A Co-Borrower Or Co-Signer On A Home Loan Make Sense?
Co-signing is the best option if the primary borrower is ready to take full financial responsibility on a property or rental agreement. The co-signer doesn’t have to put any money upfront and is only liable if the borrower defaults. The borrower can enjoy full ownership of the property or investment and start building a healthy financial future.
Co-borrowing makes more sense if the primary applicant is prepared to make a riskier, larger investment in a property. Applying together will likely increase the chances of qualifying for a larger mortgage and lower interest rates. Co-borrowing is also a better option over co-signing if the primary applicant has questionable financial habits. If they default on the loan, the co-borrower will at least have ownership in the property, whereas a co-signer will be investing solely to protect their credit score.
Of course, there are workarounds to allow for two individuals to own a property, but not apply for a loan together. This is a good option if one occupant is looking to buy after filing for bankruptcy or has poor credit. The borrower would simply add both names on the property deed and leave the other name off the loan application.
The Bottom Line: Kick Off Your Home Buying Journey
No matter your financial history, we’re here to help you take the next steps to buying a home. A crucial first step to the home buying process is to get a preapproval. You can get preapproved with Rocket Mortgage® today and start the next phase of your home buying journey.