Co-borrower vs. co-signer: What's the difference?

Getting approved for a mortgage isn’t always easy, especially if your credit or income needs a boost. Applying for a loan with a co-borrower or co-signer may help you get approved. Co-borrowers and co-signers add their financial strength to your application to help you qualify. Both take responsibility for paying the loan, but those responsibilities are exercised differently.

What is a co-borrower?

A co-borrower has equal responsibility for the loan and often has legal ownership rights to the asset. They may be taking a loan in partnership with another person to buy property you both can use.

A common co-borrowing situation would be buying a home or car with a spouse. Each spouse is a co-borrower with responsibility for paying the loan and the right to drive the car or live in the home. Lenders typically review both parties’ financial information and credit qualifications with equal weight. A co-borrower is sometimes known as a co-applicant.

A co-signer agrees to take responsibility for a loan without owning the home, car, or other asset the primary borrower is buying. The co-signer typically plays a supporting role, using their credit and income to get the loan approved and agreeing to pay the loan if the primary buyer defaults.

A common example would be a parent co-signing a loan to help their child purchase a home or car. The co-signer is there to provide a guarantee if you’re unable to make the payments. You can co-sign applications for auto loans, personal loans, small business loans, mortgages, and credit cards.

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

Not quite. While they both help you qualify for a loan, co-borrowers have a vested interest in the loan from the start. Co-signers only step in when the primary borrower defaults on payments. When it comes to mortgages, some lenders treat both roles the same way. Whether your supporter is a co-signer, co-borrower, or co-applicant, their financial history matters.

Does being a co-borrower or co-signer give ownership in assets?

Whether being a co-borrower or co-signer gives you the right to use the funds and the property purchased depends on whether there’s a title associated with the assets.

Title is a bundle of ownership rights given to the titleholder. A title is typically associated with larger purchases like vehicles and homes. Generally, if there’s a title being transferred, the only ones with ownership rights in the asset are those named on the title. There are exceptions to this:

• Community property: In community property states, property purchased during the marriage is held equally by both spouses. There are exceptions for property included in pre- or post-nuptial agreements, inherited or gifted property, and anything owned prior to marriage.
• Dower: Dower rights mean that ownership interest is automatically transferred to a spouse on the passing of the titleholder.
• Homestead: Some states recognize homestead rights that give an interest in a property based on it being a person’s primary residence.

In the case of the passing of the primary borrower, if the co-borrower isn’t on the title, they don’t have ownership rights passed to them. The next in line would be determined by a will or other probate decision. The exception would be automatic property rights for non-titled spouses in states that recognize dower rights.

Personal loans, credit cards, and other financial instruments that don’t have collateral associated don’t involve titles. In this case, both borrowers have equal access to and ownership in the funds available through the loan or credit account.

Comparing co-signers and co-borrowers

Let’s break down what’s similar and different for co-signers and co-borrowers.

Pros and cons of using a co-borrower

Applying for a loan with a co-borrower has benefits and drawbacks.

Pros

• Shared ownership: With equal responsibility for the loan, all borrowers are motivated to ensure timely payments.
• Stronger mortgage application: A lender will look at the credit and financial situation of both borrowers, which can strengthen the mortgage application.
• The ability to split closing costs and payments: Getting a mortgage with a co-borrower lets you split the cost of buying and owning a home. This includes everything from the down payment and closing costs to the monthly mortgage payment, property taxes, insurance, and maintenance.

Cons

• Need for agreement: Where there’s shared ownership, both parties need to agree to sell the property or refinance the loan.
• Potential strain on the relationship: Making a major financial commitment with another person can strain any relationship when there’s a disagreement about the loan or property.

Pros and cons of using a co-signer

Co-signing a loan also has its pros and cons.

Pros

• No shared interest: Since your cosigner has no ownership interest, you don’t need their approval to sell or refinance.
• Easier qualifications: The weight of a co-signer can lower your debt-to-income ratio and allow you to borrow more money.

Cons

• Dips in their credit score: When you apply for a loan, credit scores drop temporarily for both borrowers, though they rebound quickly if you make on-time payments.
• Lower credit score still matters: When qualifying for a mortgage with a co-borrower or co-signer, the lowest median credit score is usually what counts. The exception is certain loans that conform to Fannie Mae’s standards, which take the average of all borrowers’ median credit scores.
• Legal responsibility for the loan: Co-signers need to be prepared to repay the loan if the primary borrower defaults.

Which is the right choice for your needs?

The best option for you depends on your goals and financial situation.

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

If you’ve reviewed your finances and need to boost your credit score and rein in your DTI ratio to get a loan, a co-signer could help.

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

If you’re planning to buy a home with another person, such as your spouse, making them a co-borrower makes sense. In addition to improving your chances of approval, you’ll both have your name on the title and an equal interest in the home.

Does my credit score matter if I have a co-signer or co-borrower?

You should always check and, if necessary, improve your credit score before applying for a loan. Whether the lender is looking at the lowest median score or the average of the median credit scores, the number still matters. Beyond basic qualification, higher credit scores mean better interest rates on your loan.

The bottom line: Both have their benefits

Both co-signers and co-borrowers can strengthen your loan application. Co-signers do not have an ownership interest in the asset securing the loan, whereas co-borrowers may share ownership. Whether they do depends on whether there’s a title involved in who’s on it.

When qualifying for a mortgage, the application is treated the same way regardless of whether the person supporting your loan is a co-signer or a co-borrower. The credit scores of both individuals are considered.

If you’re feeling confident in your options and ready, you can fill out a mortgage application online.