When trying to qualify for a mortgage, many homebuyers will apply with a co-borrower or co-signer to make their application stronger. Another person’s income, assets, or credit can sometimes be the boost needed to get approved. However, the terms co-borrower and co-signer are not synonymous and there are some important differences.
What is a Mortgage Co-Borrower?
A co-borrower is someone who is intended to be a full partner in the home owning process. Oftentimes it is the spouse or partner of the other borrower, although being related is not a requirement for co-borrowing. Both parties typically live in the property and equally share financial responsibility and ownership of the home. Both borrowers are listed on the title.
What Is a Mortgage Co-Signer?
A co-signer acts as a guarantor for the primary borrower, taking on the responsibility of paying for the house if the borrower can’t do it for any reason. Typically, co-signers do not intend to live in the house or share in the maintenance of the property. Often the co-signers are parents or grandparents who have an emotional interest in helping their loved one buy a house. The co-signer does not have to make monthly payments, but is basically a living insurance policy for both lender and borrower. They definitely share financial liability in the case of default.
As a side note, anyone with a financial stake in the sale cannot be a co-signer. This includes the home seller, the real estate agent, or home builder.
Pros and Cons of a Co-Borrower
Having a co-borrower with a strong financial record can help homebuyers more easily qualify for a home loan, look more appealing to sellers, and even help increase the home price the buyer can afford.
On the flipside, if the two borrowers divorce, split up, or otherwise part ways, they have to work out whether to sell the house or have one buy the other out. In short, it can get messy. And if one-person defaults on their portion of the loan, it can affect the credit of the other borrower.
Pros and Cons of a Co-Signer
Having a co-signer can help a borrower with lower credit scores or less income qualify for a home purchase where they otherwise wouldn’t. Plus, the co-signer is not on the title, so the borrower has full control and ownership.
The drawbacks and risks are really for the co-signer. If the borrower is late or misses a payment, it can bring down the co-signers credit profile. Also, the co-signer may not have as much borrowing capacity for other loans as long as they are responsible for the borrower's mortgage. The co-signer has no ownership claim on the property but they have all the liability.
In Summary
The main difference between a mortgage co-borrower and a co-signer is their level of responsibility and ownership in the loan. A co-borrower is equally responsible for repaying the loan and has an ownership stake in the property, while a co-signer is responsible for the loan if the primary borrower defaults but does not have any ownership rights to the property.
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