With a good credit history, you may be able to qualify for the best rates and terms on a loan. But if your credit score is lower than you’d like or is prohibiting you from qualifying, you can strengthen your loan application by applying with a co-borrower or co-signer.
Both co-borrowers and co-signers can help you qualify for financing to buy a house, and both are responsible for repaying the loan if you default on it. Otherwise, these two roles look quite different.
Key Takeaways:
- Both co-signers and co-borrowers can help you qualify for a mortgage, but they aren’t the same thing. Co-signers guarantee the loan but have no ownership of assets. Co-borrowers have equal ownership of assets and share the responsibility of repayment from the beginning.
- If the primary borrower misses payments, both co-signers’ and co-borrowers’ credit can take a hit. That’s why it’s essential to have open communication and a solid plan before entering into an agreement.
- Co-signing is ideal for helping someone secure a loan without personal benefit, whereas co-borrowing works best for shared financial goals or joint ownership of an asset.
What Is The Difference Between A Co-Signer And A Co-Borrower?
When buying a house, you may consider adding a co-signer or co-borrower to your mortgage loan. Having a responsible borrower on your loan can help you qualify for a mortgage or even secure a lower mortgage rate and, as a result, a lower mortgage payment.
The main difference between a co-signer and a co-borrower is the responsibility for payments and ownership of the assets. Here’s an overview of each role:
- Co-signer: A co-signer lets you leverage their good credit score when applying for a loan and is usually a family member or close friend. They’re responsible only for taking over the monthly payment if you default on your loan. They don’t have any ownership over the assets.
- Co-borrower: A co-borrower is someone you apply for a loan with, usually a family member or spouse with equal ownership of the investment. A co-borrower is equally responsible for making the regular monthly payments.
Here’s a quick overview of the differences between the two:
Co-Signer vs. Co-Borrower Explained
| Co-Signer | Co-Borrower |
|---|---|
| Allows the borrower to level their good credit – usually a family member or friend. | Someone you jointly apply for a loan with – usually a spouse or family member. |
| Assumes financial responsibility for the loan if the borrower defaults on it. | Is equally responsible for making the monthly payments. |
| Has no ownership over the assets, and their name isn’t listed on the deed. | Has full ownership over the assets, and their name is listed on the deed. |
If you’re considering adding a co-signer or co-borrower to a mortgage loan application, you will want to choose someone you trust. Both options come with a certain level of risk, so make sure everyone understands their responsibility.
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What Is A Co-Signer?
A co-signer is usually a family member or friend who helps strengthen a borrower’s mortgage application by adding their income and credit history to the borrower’s. The co-signer must repay the debt if the borrower fails to make their loan payments.
However, a co-signer isn’t responsible for making monthly payments on the loan, and their name isn’t listed on the deed. Most people use a co-signer when applying for student loans or auto loans.
A co-signer is best if you’re just looking for someone to help you qualify for a loan. For example, if you’re a young adult with limited credit history and have difficulty qualifying for a loan, applying with a co-signer may be a good option. You should take on a co-signer only if you are confident in your ability to repay the loan, as your default will put their finances and credit at risk.
Pros
In the right situation, applying with a co-signer can be mutually beneficial for both parties. Here are some of the most significant benefits of using a co-signer:
- Increased approval odds: Applying with a creditworthy co-signer will improve your odds of qualifying for a loan, especially if you have poor credit or limited credit history.
- Lower interest rates: Leveraging another borrower’s excellent credit score can help you qualify for the lowest interest rates and best terms on your loan.
- Improved credit: Making on-time payments will improve both individuals’ credit scores.
Cons
Here are some downsides you and your co-signer should consider before applying:
- Financial responsibility: If you can’t make the monthly loan payments, your co-signer must assume financial responsibility for the loan.
- Damaged credit: Both you and your co-signer will see your credit scores and histories suffer if you make late payments.
- Potential harm to the relationship: If you can’t manage the loan responsibly, you could damage the relationship with your co-signer.
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What Is A Co-Borrower?
A co-borrower shares financial accountability for a loan from the start and is equally responsible for making the monthly payments. They also share ownership of the asset. Like a co-signer, a co-borrower’s credit history and income contribute to the borrower’s loan application. While this isn’t always the case, co-borrowers are typically listed on the house’s title.
Adding a co-borrower to your loan usually makes sense when both parties want to share the responsibility and benefit of the loan. For example, a married couple applying for a mortgage together would be considered co-borrowers.
Pros
Here are the most significant benefits of using a co-borrower:
- Mutually beneficial: Both borrowers have equal ownership of the property and share responsibility for the monthly payments.
- Easier to qualify: If your co-borrower has good credit and a low debt-to-income ratio, it’ll be easier to qualify for the loan.
- Higher loan limit: Adding a co-borrower to your loan means the lender will consider both your assets and incomes, leading to a potentially higher loan limit.
Cons
Here are some things to consider before using a co-borrower:
- Equal responsibility: Co-borrowers are equally responsible for making the monthly payments and repaying the loan.
- Legal repercussions: If one co-borrower dies and the other borrower isn’t listed as a successor on the deed, this can cause legal challenges.
- Shared debt liability: Sharing debt with another person can lead to confusion and miscommunication when it comes to making payments.
- Risk to relationship: If one person doesn’t uphold their side of the agreement, having a co-borrower on a loan has the potential to damage the relationship, particularly between a parent and child.
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How Are They Similar?
While the two are notably different, there are some similarities between co-borrowers and co-signers:
- Both help secure larger loans and lower interest rates: Both co-borrowers and co-signers can help primary borrowers secure larger loans and lower mortgage interest rates. If you’re a borrower with bad credit, you can benefit from a co-borrower’s low debt-to-income ratio and good credit history.
- Both accept financial responsibility for the loan: Though the level of financial responsibility varies a little, both co-borrowers and co-signers are ultimately responsible for repaying the loan. If the primary borrower defaults on the loan, the co-borrower or co-signer must take over the monthly payments.
What To Consider Before Co-Borrowing Or Co-Signing
Taking out a loan with a co-borrower or co-signer can be a good choice, particularly when both parties are aligned on a common goal or one party wants to support the other. For example, it may make sense for spouses to be co-borrowers or for a parent to co-sign an adult child’s loan.
However, whether co-borrowing and co-signing is a good idea depends on your financial situation, your relationship with the co-signer or co-borrower, and the risks to each party’s credit. Here are some factors to consider before signing on the dotted line:
- Current and future finances: Consider your current and future financial situations before applying for a loan with a co-signer or co-borrower. Make sure you can afford to repay the loan. If you default, you’ll damage the other person’s credit and put them in a difficult financial situation.
- Alternative options and scenarios: Explore your alternatives before applying with a co-borrower or co-signer. For example, could you spend time improving your credit score first? Would your lender allow a co-signer or co-borrower to be removed in the future, for instance, in the case of divorce?
- Credit utilization: Look at your credit utilization rate before using a co-borrower or co-signer. Your credit utilization rate is how much of your available credit you’ve used, and a high rate can indicate you’re financially overextended. A high credit utilization rate could negatively impact your co-signer’s credit.
FAQ
Here are answers to common questions about applying for a loan with a co-signer or co-borrower.
The Bottom Line: Which Is Best For You?
A co-signer is the better option if you only need to leverage another person’s good credit history to secure a loan. You get to enjoy full ownership of the property and may qualify for better rates and loan terms as a result of your co-signer’s credit. Alternatively, if you’re in a place to help someone you trust get a loan, offering to be a co-signer is an option you can consider.
Co-borrowing makes sense if you want to share a loan with someone to achieve a mutual goal – as long as you’re clear on the risks. By applying together, you’ll likely qualify for a larger loan amount and lower interest rates.
Whatever your choice, it’s important for a co-signer or co-borrower to be someone you trust and can communicate openly with.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
