A co-borrower has a legal claim over loan funds and the purchased asset, while a cosigner does not have any legal claims to the money or property.
When you’re going through the mortgage process, you’ll likely hear the terms “co-borrower” and “co-signer” come up. It sounds like they are relatively similar, but there are some very important differences. Both co-borrowers and co-signers can help increase the odds of being approved for a mortgage. However, different levels of responsibility come with each type.
Who Is a Co-Borrower?
A co-borrower is a person who shares the ownership of the mortgage loan with you. This means they have shared ownership of the property and appear on the home’s title. It also means that all co-borrowers are equally responsible for repaying the mortgage. All co-borrowers should be people who intend to share ownership or interest in the home. For example, spouses might be co-borrowers on a mortgage. Or, in the case of an investment property, co-borrowers should be those who intend to manage and benefit from the property.
Learn more about mortgage co-borrowing here
How Co-Borrower Works
Co-borrowers apply for a mortgage together. This means that both of their assets and debts will be considered in the mortgage application. Depending on the financial circumstances of both co-borrowers, this could be a benefit or a detriment. For example, if one co-borrower has significant debt and a lower credit score, it could result in a higher interest rate than if the other co-borrower had applied alone. However, having two borrowers could also result in approval for a higher loan amount.
Once the mortgage has been approved, both co-borrowers will have equal legal rights to the property. They will share the responsibility of repaying the mortgage on time.
Pros and Cons of Co-Borrower
Everyone’s situation is different, and a co-borrower might not be right for every situation. Understanding the pros and cons of having a co-borrower can help you make the best-informed decision.
| Pros | Cons |
| Co-borrowers with good credit history can improve the chances of a higher loan amount and lower interest rates. | If the relationship between co-borrowers sours, it can make dividing the assets and responsibility of the home and mortgage difficult. |
| Co-borrowers share responsibility for repaying the loan, which can ease the burden of one person repaying the mortgage alone | Since both co-borrowers are equally responsible for repaying the loan, if one person doesn’t hold up their share of the payments, it could result in the lender coming after you or negatively impacting your credit score. |
| Using a co-borrower can help some people with alternative income sources qualify for a mortgage when they otherwise might not be able to. | In some cases using a co-borrower can improve the chances of a higher loan amount and lower interest rate. However, it can also result in higher interest rates or being denied for a mortgage altogether. |
| Using a co-borrower can ensure that both parties have an equal amount of ownership and access to the assets of the home. | Co-borrowers need to carefully examine their assets, debts, income, and credit history to determine whether co-borrowing is the right solution. |
What Is a Co-Signer?
A co-signer is a person who takes on the full responsibility of repaying a loan if the borrower doesn’t make their payments on time. They do not have any legal rights to the property they co-signed the loan on.
Co-signers are often used when the primary borrower would not qualify for the mortgage on their own. This could be because they have no credit history, a poor credit history, a low income level or a high debt-to-income ratio. A co-signer is usually a close relative or friend of the primary borrower.
Learn more about co-signing mortgages here
How Co-Signer Works
Co-signers usually become co-signers when the primary borrower has been denied a mortgage on their own. At that point, the borrower can ask someone to co-sign the loan for them. The co-signer will then fill out an application of their own, and their financial information is used to determine the terms and interest rate of the loan.
If the borrower misses a mortgage payment, the co-signer will be informed. Since they have essentially guaranteed the loan, they will be held fully liable for repaying it.
Pros and Cons of Co-Signer
Co-signers can be a great option in some cases. However, there are risks involved with being a co-signer. This needs to be taken into careful consideration.
| Pros | Cons |
| A co-signer can help a borrower get approved for a loan. | It is risky to be a co-signer because if the primary borrower doesn’t repay the loan, the co-signer is held fully responsible. |
| Using a co-signer can help the primary borrower get a lower interest rate on the loan. | A co-signer doesn’t have ownership of the property and cannot build equity. |
| The primary borrower does not need to worry about sharing legal ownership of the property with the co-signer. | The co-signers credit score could be negatively impacted at least temporarily, or long-term if the primary borrower defaults on the loan. |
| Using a co-signer can help the primary borrower build a positive credit history and increase their odds of approval for future loans. | A co-signer needs to have a good credit history and meet other financial requirements to qualify. |
Differences Between a Co-Borrower and a Co-Signer
There are several important differences between a co-borrower and a co-signer. Both can be good options depending on the situation, but it’s important to understand the differences to figure out what’s best for you.
| Co-Borrower | Co-Signer |
| Co-borrowers have equal rights to the property that is being purchased with the loan. | A co-signer does not have any rights to the property. |
| Co-borrowers can build equity in the property. | Co-signers are unable to build equity because they don’t share ownership of the property. |
| Co-borrowers are expected to make monthly payments on the mortgage from the beginning. | Co-signers are only expected to make payments on the loan if the primary borrower defaults on it. |
| If the relationship between co-borrowers sours, they’ll need to determine how to split the home equity and responsibilities of the loan. | If the relationship between the primary borrower and the co-signer sours, there is no impact on the loan or the assets. |
| Co-borrowers typically enter into the mortgage process together and apply together from the beginning. | A co-signer usually gets added on after the primary borrower has submitted their application. |
Similarities Between a Co-Borrower and a Co-Signer
While there are many differences, there are some similarities between co-borrowers and co-signers.
| Co-Borrower | Co-Signer |
| Co-borrowers can help strengthen a mortgage application, improving approval odds. | A co-signer can help improve the approval odds for the primary borrower. |
| A co-borrower’s credit can be impacted by late payments or defaulting on the loan. | A co-signer’s credit can be impacted by late payments or defaulting on the loan. |
| Co-borrowers have to be willing to assume the responsibility of paying off the loan. | A co-signer has to be willing to assume the responsibility of paying off the loan. |
What Are the Necessary Steps to Take Prior to Becoming a Co-Borrower or Cosigner?
Before co-borrowing or co-signing a loan, it's important to have a clear discussion about the loan's necessity, explore other options, and review financial situations and goals. Establishing a formal agreement detailing responsibilities is advisable due to potential financial risks. It's also essential to understand co-borrower and co-signer rights in your state. If you want part ownership or access to funds, co-borrowing is better; if you just want to help someone obtain a loan, co-signing may be the right choice.
Which Is Better — Co-borrower vs. Co-signer?
This depends on your personal relationships and financial situation. If you are buying a home with a spouse, being co-borrowers would likely make the most sense. For people with little to no credit history, a co-signer might make more sense. It’s important to consider the pros and cons of both options before making your decision.
Frequently Asked Questions
Does it matter who the borrower and co-borrower is?
It’s a good idea for the borrower and co-borrower to have a good relationship. It’s also a good idea for them to both plan to live in the home or benefit from the home in some way.
Who owns the house borrower or co-borrower?
The borrower and co-borrower share equal ownership of the house.
Is it better to be a co-borrower or guarantor?
It depends on the situation — if you want to build equity and share ownership of the home, it’s better to be a co-borrower.