Co-Borrower Vs. Co-Signer: What’s The Difference?

The strength of your credit and finances is a major consideration when applying for a mortgage. However, if you don’t have great credit or you’re worried your income is too low to qualify for the amount of money you need to buy a home, you have options. Working with a co-signer or a co-borrower to purchase the home can make your financial situation look better to your lender.

A co-signer or a co-borrower can strengthen your mortgage loan application. Let’s take a look at their similarities and differences so you’ll be equipped to decide whether working with a co-borrower versus a co-signer on your mortgage application is better for you.

A co-borrower is someone you plan on purchasing the home with. This may be a friend, spouse, significant other or family member who will live in the home with you or likely use it in some way. When you work with a co-borrower, lenders will view their financial details alongside yours, giving both equal weight.

Once your mortgage application is approved, your co-borrower will have the same legal rights to the property and the same mortgage responsibilities as you.. In addition, they’ll have the right to use the property as they see fit.

A co-signer is someone who agrees to use their financial strength and credit score to help you qualify for a better mortgage. Most often, co-signers are close friends or family members, but you’re free to work with anyone who’s willing to help.

Co-signers assume responsibility for the mortgage if you default or fail to make payments on time, but they do so without being able to live in the home or having any ownership rights to the property. Lenders expect you, as the primary borrower, to make your monthly mortgage payments on time until the loan is paid in full.

Co-signers and co-borrowers have some similar functions.

Both Help Strengthen Loan Applications

Both co-signers and co-borrowers strengthen your mortgage application. The lender will look at a co-signer or co-borrower’s finances to determine if they can make the minimum monthly payments on the loan if you fail to pay your mortgage on time. Your lender will take their credit score and income into consideration when reviewing your application.

This makes it easier for you to qualify for financing and may help you secure a larger loan, a lower interest rate or both.

Both Are Responsible For The Loan

When someone agrees to be a co-signer or a co-borrower on a loan, they accept responsibility for the loan in full if you default or stop making payments on time. Regardless of whether they live in the home, they’re required to make payments to your lender if you can’t.

While co-signers and co-borrowers serve some of the same purposes before and after you’re approved for a loan, let’s consider some of the differences between the two.

Their Ownership Interest In The Property

Co-signers guarantee the loan, meaning they’ll take over payments if you are unable to make them. They have no ownership interest in the property and can’t decide to sell the property if they don’t pay the loan. Ownership of the property belongs to the primary borrower, and only they can make decisions about selling the property.

Co-borrowers, on the other hand, have an ownership interest in the property. When you apply for a loan with a co-borrower, the lender views both of your finances equally and expects both of you to gain equity in the property as you make payments on the loan. However, both co-borrowers will need each other’s consent to sell or refinance the home.

Their Reward

When someone co-signs a loan, they accept all of the risks without the reward of building equity in the home. Their name isn’t on the house title, and they can’t do anything with the property even if the primary borrower defaults on the mortgage.

When someone applies for a mortgage as a co-borrower, their name is on the title of the property and they’re able to leverage the equity they build in the home. Just like a co-signer, a co-borrower takes on the risk of having to make the full mortgage payment alone if you default – but they’ll typically reap the reward of living in the house and owning it.

Here’s a breakdown of the main differences between co-signers and co-borrowers.

Working with a co-borrower can be a great option if you’re worried that your finances aren’t strong enough to qualify for the type of mortgage you need on your own. However, in order to make the right decision, it’s important to understand the pros and cons of working with a co-borrower.

The Pros

Here are a few benefits you’ll experience when you buy a home with a co-borrower.

• Shared ownership: Co-borrowers have an ownership interest in the property, meaning they have just as much to lose as you if the mortgage goes into default. Knowing this can encourage them to make sure the mortgage is paid on time each month.
• Stronger mortgage application: Since a lender looks at the co-borrower’s finances in addition to yours, the lender may be willing to give you a larger loan or a lower interest rate. Co-borrowers can make your mortgage application appear stronger.
• The ability to split closing costs: When you buy a house with a co-borrower, you can split the closing costs due on closing day. This lowers the amount of cash you’ll need upfront.

The Cons

Here are a few of the downsides to buying a home with a co-borrower:

• Two names on the title: When you share ownership with someone, you’ll have to ask for their permission to sell the property or refinance the mortgage. The co-borrower must agree to the changes before you can take action.
• Potential strain on the relationship: Buying a house with another person is a huge financial commitment, and it may put stress on the relationship. If the two of you disagree on how to manage payments or manage the property, you risk not getting along.

Like co-borrowers, co-signers can make your mortgage application look stronger before asking someone to co-sign a mortgage for you. Here are some benefits and downsides of using a co-signer.

The Pros

Here are a few perks of using a co-signer to help you buy your home:

• No shared interest: Co-signers don’t have an ownership interest in the property. This means you’ll be able to do as you wish with the property without consulting them.
• Easier qualifications: A co-signer carries as much weight on a mortgage loan application as a co-borrower. So, having a co-signer can likewise make it easier for you to qualify for a mortgage even if your finances aren’t perfect.

The Cons

Here are a few of the downsides of using a co-signer to help you qualify for a mortgage:

• Dips in their credit score: Lenders will check the co-signer’s credit score as part of the mortgage application process, potentially causing their credit score to drop. If the application is approved, it may appear on the co-signer’s credit report and cause their score to drop further.
• Legal responsibility for the loan: Co-signers are legally responsible for the loan if you fail to make payments. This can put undue strain on their finances if they’re not prepared.

Choosing between a co-signer and a co-borrower largely depends on your situation. If you have a close friend, spouse or partner whom you want to purchase a home with, letting them be a co-borrower on the mortgage probably makes the most sense. They’ll likely be living with you and able to enjoy the full benefits of homeownership.

However, if you plan on buying the home on your own but need someone to bolster your finances and your credit score to make your mortgage application stronger, a co-signer will be the best choice. They won’t have an ownership interest in the property and will only serve as a guarantee to your lender that the mortgage will be repaid on schedule.

Understanding the difference between a co-signer and a co-borrower is essential if you want to make the right choice for your mortgage application. Here are a few frequently asked questions to help deepen your understanding.

Is a co-borrower the same as a co-signer?

Lenders may view a co-signer and a co-borrower in the same light on your mortgage application, but they fill the role in different ways. A co-signer agrees, without having any ownership interest in the home, to strengthen your mortgage application by letting the lender consider their finances and promising to pay back the loan if you default. A co-borrower helps strengthen your mortgage application while also having ownership interest in the property.

How do I know if I need a co-signer?

Review your finances in detail. If your credit score is low or you don’t make enough money to qualify for the size of mortgage that you need, a co-signer may be a good solution. Lenders will consider their finances alongside yours, potentially giving you a lower interest rate and/or a higher loan amount.

How do I know if I need a co-borrower?

You’ll want to use a co-borrower if you’re planning on buying a house with another person. For example, if you and your significant other are buying a house and you want them to have an ownership interest in the property, they should be a co-borrower on your mortgage application.

Do I need to worry about my credit score if I have a co-signer or co-borrower?

Yes. Co-borrowers and co-signers can strengthen your mortgage application, but it’s always best if your credit score is as high as possible when you apply. The higher your score, the more likely your lender will be to give you a great loan at a lower interest rate. Strive to improve your credit score as much as you possibly can before submitting a mortgage application to a lender.

Both co-signers and co-borrowers can help strengthen your mortgage application by combining their finances and credit score with yours. Co-signers simply guarantee your mortgage, while co-borrowers will also have an ownership interest in the property you buy.

If you’re ready to apply on your own or with a co-signer or a co-borrower, don’t wait. Start the mortgage application process with Rocket Mortgage®.