Co-Borrower vs. Co-Signer: Which One is Right for You?

It is no secret that buying a home is a significant life decision. Once you’ve done your research, gotten prepared, and are ready to take that financial leap, you might need a little help to secure your dream property. This often involves bringing in another person to strengthen your mortgage application as either a co-borrower or a co-signer.

But what’s the difference between a co-borrower and a co-signer, and which one is right for you? In this blog post, we will break down the key differences between what each role is responsible for when it comes to helping you buy a home, and when it might be beneficial to choose one over the other.

Why Use a Co-Borrower or Co-Signer?

In the complex world of mortgage approvals, having a co-borrower or co-signer can often be the key to unlocking homeownership. Lenders scrutinize various factors like credit scores, income levels, and debt-to-income ratios to assess a borrower’s ability to repay the loan. If any of these factors fall short, enlisting the help of a co-borrower or co-signer can significantly bolster your application.

A co-borrower’s income and creditworthiness are combined with yours, potentially qualifying you for a larger loan or a lower interest rate. Similarly, a co-signer’s strong credit history acts as a safety net for the lender, reducing their perceived risk and increasing the chances of loan approval. Whether it’s to overcome credit challenges, bridge income gaps, or simply secure better loan terms, having a co-borrower or co-signer can be a vital strategy in navigating the path to owning your own home.

Co-Borrower: Shared Ownership and Responsibility

A co-borrower is essentially a co-owner of the property. Co-borrowers share equal responsibility for covering the costs of ongoing mortgage payments, property taxes, and maintenance. Their name appears on the title, and they have a legal claim to the property. This also means that the mortgage affects their credit score. An initial mortgage credit inquiry will cause a slight dip in their score, which is temporary. If a mortgage payment is missed or if you default on the loan, your co-borrower’s credit score (along with yours as the primary borrower) will be negatively impacted. However, on-time mortgage payments will build and improve the overall credit score for you and your co-borrower.

Co-Signer: Credit Support, Limited Liability

A co-signer acts as a guarantor for the loan. They pledge their creditworthiness to help you, the primary borrower, qualify for the mortgage. This option may be helpful if you have little credit history or poor credit. Like a co-borrower, a co-signer will have a mortgage credit inquiry, which will cause a temporary dip in their credit score. A history of on-time mortgage payments may also help build both your and the co-signer’s credit profiles. While a co-signer’s credit score is impacted by the mortgage, they typically have no ownership rights to the property. However, if you miss payments or default on the loan, the co-signer is legally obligated to make the payments.

Key Differences: Co-Borrower vs. Co-Signer

Let’s dive deeper into the most important differences between co-borrowers and co-signers:

• Legal Obligations: Co-borrowers are equally liable for the mortgage. Co-signers are only liable if the primary borrower fails to meet their obligations.
• Ownership Rights: A co-borrower has ownership rights to the property, while a co-signer does not.
• Financial Responsibility: Co-borrowers share the financial responsibility for the mortgage, including payments, taxes, and maintenance. Co-signers are only financially responsible if the primary borrower defaults.
• Credit Implications: Both co-borrowers and co-signers experience a significant impact on their credit scores. Positive payment history benefits both, but negative marks harm both as well.

When to Choose a Co-Borrower vs. a Co-Signer

Choosing between a co-borrower and a co-signer depends on your unique situation.

• Co-Borrower: This is a good option when two or more people are purchasing a home together and plan to share ownership and financial responsibility.
• Co-Signer: This might be suitable when the primary borrower has a limited credit history or a lower income but has a reliable person willing to vouch for them. Co-signers are usually parents or relatives of the primary borrower.

In some cases, a guarantor might be an alternative. This person guarantees the loan but typically has no legal obligation to make payments unless specific conditions are met.

Legal and Financial Considerations

Being a co-borrower or a co-signer carries significant legal and financial implications. Both roles can impact your credit score, ability to secure future loans, and overall financial well-being. It’s essential to fully understand the terms and potential risks involved if you’re thinking about co-signing or co-borrowing with someone on a mortgage loan.

Another thing to consider is what happens if you’d like to remove a co-signer or co-borrower from the loan. Removing a co-borrower or co-signer from your loan usually involves refinancing the current mortgage into a new one. Suppose you want to keep your property after a divorce. Depending on your divorce agreement, you may need to refinance to a new loan based on your individual qualification criteria, and/or pay out any equity gained to your former co-borrower.

Before making any decisions, consult a qualified legal or financial professional to ensure you’re making the best choice for your situation.

Understanding the difference between a co-borrower and a co-signer is helpful when navigating the mortgage process. Each role comes with its own responsibilities, risks, and rewards.

By carefully weighing your options and seeking expert advice, you can make an informed decision that paves the way to successful homeownership. Get started with one of our expert loan officers to find the best option for you.