What is a Co-Borrower?
JW
Last updated 03/26/2024 by
Jacob WilsonSummary:
Obtaining a loan can be difficult, particularly if you are applying for a large loan, such as a mortgage, and you don’t have enough income or credit to qualify. Thankfully, you can share the responsibility of paying for the loan and improve your chances of approval if you get a co-borrower. A co-borrower is someone who shares the liability of a loan and will typically share title in the home, vehicle, or whatever asset the loan is for.
Qualifying for a mortgage, a personal loan, or an auto loan can be a challenge if you have a modest income and less-than-perfect credit. It’s particularly difficult to qualify for a large loan, such as a mortgage. A co-borrower can help improve your chances of approval and reduce the financial stress of repaying it. With a co-borrower, the financial responsibility of a home loan won’t weigh on you alone. Even though this opens new opportunities, a co-borrower is not without its risks.
We weigh the pros and cons of a co-borrower for you, offering a clearer picture of whether adding another person’s name to your loan is the best option for you. But what exactly is a co-borrower?
What is a co-borrower?
A co-borrower is someone who shares the liability of a loan with another borrower. Under this arrangement, both parties involved make loan payments. The co-borrower is also subject to all aspects of the loan, such as interest, late fees, and penalties.
The title of the home and other assets involved with the loan is often shared between all borrowers, but this is negotiable.
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Benefits of a co-borrower
A co-borrower is beneficial for several reasons. A single borrower may qualify for a loan application or receive better loan terms with a co-borrower. If the borrower already has the opportunity to get a loan, they may instead be able to get better terms on it with a co-borrower. This arrangement is especially helpful for those without a credit history, as it not only increases your chances of getting a loan but gives you a chance to start forming a good history.
If you want to share legal ownership of a property with someone, a co-borrower agreement could simplify the legal process. Co-borrower agreements are common in close relationships with established trust, as the agreement ensures that both parties have equal ownership of the new home or property title.
How can I qualify for a loan with a co-borrower?
Almost anyone can be your co-borrower, but we recommend you bring someone on that you trust. Since your co-borrower will make partial payments to your lender, you’ll want someone with a history of prompt payments and reasonable credit. A co-borrower acts as a safety net in lenders’ eyes, as an additional person will ensure any debts are repaid even if one person starts to fall behind.
Though anyone can be a co-borrower, lenders will still review both your credit score and that of your co-borrower. If you both have credit scores or income levels that are too low, you may still not qualify for decent loan terms.
Are co-borrowers only helpful for home loans?
Fortunately, co-borrowers can help you get personal and auto loans, too! While not every lender allows for a co-borrower, we found the top auto and personal loan lenders that do.
Auto Loans
The cars of today get more expensive with each model. But you need a way to get around! By applying for an auto loan with a co-borrower, you’ll be open to better loan terms and interest rates. We recommend checking out these options:
Personal Loans
Co-borrowers can also help you get better personal loan terms. We’ve all been through tough financial times, and some of us need a little more help than others. If you’re unhappy with the personal loan terms you’ve received in the past, applying with a co-borrower may help with that. Take a look at these options for personal loan lenders that accept co-borrowers:
How does the co-borrower process work?
Applying for a mortgage with co-borrowers is similar to the process you’d complete by yourself. The lenders will examine your financials such as gross monthly income, credit scores, credit history, and any assets you have for a down payment. Because lenders repeat this process for your co-borrowers, the process will take a little longer.
Is my spouse a co-borrower?
While spouses are commonly co-borrowers in a home loan, they are not legally considered a co-borrower if their name isn’t on the loan documents. It’s not mandatory for spouses to be co-borrowers in a loan together.
Pro Tip
You can be a co-borrower without adding your name to the property’s title. However, this means you assume all the responsibilities that come with a mortgage with none of the benefits of owning the property. Keep this in mind if you offer to act as someone’s co-borrower.
Example of a Co-Borrower:
A mother wants to help her son get one of his first major loans. Her son hasn’t had the chance to form a good credit score yet, so the odds of him getting good terms are slim. On the other hand, the mother has a well-established credit history and her score is high.
The mother decides to sign on as a co-borrower for her son to help him. By applying with a co-borrower, his low credit score is offset by his mother’s high score, which results in better loan terms like a lower interest rate.
Along with all the immediate benefits, the son also establishes his own credit. This provides the foundation for reasonable loan terms in the future.
Co-borrower vs. Co-signer: What’s the difference?
The difference between a co-borrower and a co-signer usually comes down to the degree of investment in the loan. A co-borrower may have more responsibility and ownership than a co-signer, but both still play a role in loan payments.
| Co-Borrower | Co-Signer | |
|---|---|---|
| What is it? | A person who shares liability for repaying a loan where all parties have equal responsibility for the loan. | Someone who agrees to take responsibility for repaying a loan if the primary borrower misses a payment. |
| How does it work? | All parties are responsible for making payments to the loan. All co-borrowers may own assets that guarantee the loan, such as property in a home loan. | Acts as a guarantor for the primary borrower. Anyone co-signing a loan application promises to assume financial and legal responsibility for repayment if the primary borrower stops making payments. |
| What are the risks? | All co-borrowers are responsible for payment after signing the loan application. | If the primary applicant fails to meet their payments, then the co-signer becomes financially responsible for the loan and is responsible for the outstanding debt. |
| What are the benefits? | Co-borrowing is beneficial to all parties involved with the loan. Best for people who plan to share the property such as a close family member or spouse. | Best to co-sign when only one person expects to benefit from the loan property. Makes sense for people with a lack of financial history or lower credit score, but who do have the income to take on debt payments. |
Pros and cons of using a co-borrower
Co-borrowing has both advantages and disadvantages. It’s important to keep this in mind before sharing financial responsibility with any co-borrowers.
How do I get a co-borrower off my mortgage?
The most common way to get a co-borrower or co-signer off a mortgage loan is to refinance it. Other methods such as a loan assumption or a loan modification are possible but not likely without special circumstances from your lender.
Can a co-borrower sell a house?
Under normal circumstances, since co-borrowers have equal ownership of a house, they cannot sell unless all parties who share ownership agree. It may be possible to force a sale in extraneous cases by asking a court for a partition action.
Key Takeaways
- All co-borrowers share financial responsibility on the loan they sign.
- A co-borrower can increase the ability of one or both individuals to get better loan terms.
- Once a co-borrower has their name on the loan it is difficult to get it off without refinancing.
- A co-borrower and a co-signer fill similar roles in obtaining a loan. However, a co-signer only takes financial responsibility for the loan if the primary applicant fails to make their payments.
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