The Difference Between a Co-Borrower and a Co-Signer
You’ve probably heard the terms “co-borrower” and “co-signer” used interchangeably, but there are some very important differences between the two.
If you’re thinking about taking out a mortgage or a home equity loan with someone else, it’s important that you understand the difference between a co-borrower and a co-signer before you make any decisions.
What is a Co-borrower?
A co-borrower is someone who applies for a loan with you and is equally responsible for repaying the debt.
When you take out a loan with a co-borrower, the lender considers both your income and credit history and approves the loan based on your combined eligibility. The primary benefit of bringing on a co-borrower is that it can help you qualify for a larger loan amount and a better interest rate since the lender is taking both your income and credit history into account.
This is especially helpful if one of you has bad credit or a low income. However, there are also some drawbacks to taking out a loan with a co-borrower. For starters, if either of you fails to make a payment, it could have a serious impact on both of your credit scores.
And if either of you decides to move out or otherwise terminate the joint agreement, it could be difficult to transfer or terminate the loan.
A 2017 report by ATTOM Data Solutions found that 22.8% of all purchase loan originations on single-family homes in Q2 2017 involved co-borrowers — multiple, non-married borrowers listed on the mortgage or deed of trust — up from 21.3% in the previous quarter and up from 20.5% in Q2 2016.
Although there is no legal limit to the number of co-borrowers on a mortgage, lenders rarely accept applications from more than four or five borrowers due to underwriting software limitations. When applying for a mortgage with multiple co-borrowers, you may be able to obtain a larger loan; however, things can become complicated when multiple borrowers are listed on a mortgage.
What is a Co-signer?
A co-signer is someone who agrees to be responsible for repaying your loan if you default on it.
This person does not necessarily have to have any ownership of the loan, but they are taking a major risk by signing on the dotted line: if you don’t make your payments, the co-signer will be held responsible, and their credit score will suffer as a result.
There are pros and cons to adding a co-signer to your loan.
Adding a co-signer can also help you qualify for a larger loan and a better interest rate since the lender is taking their creditworthiness into account.
However, a co-signer is not necessarily considered an owner of the loan, so you won’t be able to transfer or terminate the loan without their permission.
What Are the Differences Between a Co-borrower and a Co-signer?
As you can see, there are both similarities and differences between a co-borrower and a co-signer.
The biggest difference is that a co-borrower is an owner of the loan, while a co-signer is not. In other words, a co-borrower is just as responsible as you are for repaying the loan, while a co-signer only becomes responsible if you default.
A co-borrower can also help you qualify for a larger loan, and better interest rate since the lender takes both your income and credit histories into account. On the other hand, a co-signer is primarily used to increase your chances of qualifying for a loan by helping to boost your creditworthiness.
So, Which One Do You Need?
As always, the answer to this question depends on you. If you have bad credit or are looking to take out a loan for a large amount, then a co-borrower may be the best option since it can help you qualify for a more favorable loan.
On the other hand, if your credit is solid, but you need an extra boost to qualify for a loan, then a co-signer may be the better option.
Why Not Consult with an Embrace Loan Professional?
Before signing on the dotted line with someone else, it’s important that you speak with a lender that has experience in the matter, as well as your attorney. Remember, a co-borrower is someone who applies for a loan with you and is equally responsible for repaying the debt, while a co-signer is someone who agrees to repay the debt if you default on the loan.
From conventional to FHA to VA loans and more, Embrace Home Loans® has a wide range of loan programs that could get you into your best loan, whether it’s with a co-signer or co-borrower.