Understanding Co-Borrowers vs. Co-Signers when Applying for a Mortgage

Whether you’re short on funds or credit, or even a bit high when it comes to debt, that doesn’t mean owning a home is off the table. You have options. For example, you can jointly apply with another person, whether they choose to live with you or not. It’s called having a co-borrower or co-signer, and it can be the difference-maker between mortgage approval and denial.

Learn the facts — and risks — when it comes to partnering with a mortgage co-borrower or co-signer.

What is a mortgage co-borrower?

A co-borrower is also known as a joint applicant or co-applicant. They want to share in the responsibility of buying and owning a home together. Generally speaking, mortgage co-borrowers are spouses or partners. Though co-applicant is often the preferred term when jointly applying with a relative or friend (someone you are not married to or in a serious relationship with). Having multiple borrowers can mean lower rates and can also mean a higher principal loan amount.

Does a co-borrower own the home?

Yes. Since the co-borrower is also responsible for making mortgage payments, they share in the ownership of the house.

What happens if you want someone to have property rights but don't want them to be financially liable for the mortgage? Thankfully, there is a workaround. Just make sure they're on the property's title and not the loan itself.

Co-borrower responsibilities

As a mortgage co-borrower, you:

Must be listed on the title
Have ownership interest
Obligated to pay the monthly payments
Sign all loan documents

Reasons to use a co-borrower

You want to share ownership in a home with your spouse or partner
You’re looking to apply using a stronger credit history
You can qualify for a larger loan amount
You can receive a lower rate

Risks of being a mortgage co-borrower

The co-borrower takes on the same responsibilities as the primary borrower, and therefore, assumes the same risks. As a mortgage co-borrower, you will be charged late fees when your payment is not received on time, and you’ll be financially responsible in the event of loan default.

Looking to buy a home with a friend? Let us explain some benefits and drawbacks to help you with decision making.

What is a co-signer?

When one person is looking for a loan but needs help qualifying, chances are he or she needs a co-signer. A co-signer acts as a guarantor, meaning he or she guarantees that the loan will be repaid. The co-signer does not make payments but promises to assume the responsibility of the loan if the primary borrower does not pay. Co-signers are frequently used with student loans since students don’t have the credit history to qualify on their own. Yet, co-signing is an option for mortgages, too. They’re most often used among young professionals, divorcees, and self-employed borrowers.

What’s a good credit score to buy a home? We’ve got your answer, plus tips to boost your score for better loan terms.

Co-signer responsibilities

As a mortgage co-signer, you:

Have no ownership in the property
Have income, assets, liabilities, and credit history reviewed during the application process
Are listed on the mortgage documents, but not the title
Are required to sign loan documents
Are liable for repaying the obligation if the primary borrower cannot

Reasons to use a co-signer

Though it may be difficult to ask for help, you could really benefit from a mortgage co-signer. For example:

Their income can help you qualify for a mortgage
They can contribute to your down payment as long as you make the mandatory minimum down payment requirement for your loan program

Risks of being a mortgage co-signer

Unfortunately, the risks tend to outweigh the benefits of being a co-signer. For example:

It increases your debt-to-income (DTI) ratio
Late payments made by the primary borrower will show up on your credit report
You may have difficulty obtaining your own financing or credit, as this obligation can be counted as a liability

When should I use a co-borrower or co-signer?

As we mentioned above, adding either one to your application could ultimately help you qualify for a more attractive loan program or even obtain a lower interest rate. If you have someone in mind who wants to share property rights and assist you with making mortgage payments, consider a co-borrower. Alternatively, a co-signer makes more sense if you want someone to have rights to your property but don't want to rely on them for repayment.

What is a non-occupant co-borrower?

If you have a relative who is willing to join you as a partner in homeownership but does not want to live on the property — they can act as a non-occupant co-borrower. It’s essentially a step above co-signer because they have ownership in the home — the same responsibilities and liabilities pertaining to the non-occupant co-borrower as they would a co-signer.

Applying for a loan with a co-signer

Whether or not you can apply with a mortgage co-signer will depend on the type of loan you’re seeking. Non-occupant co-borrowers are most commonly seen on conventional loans and certain types of FHA loans. USDA loans do not allow non-occupant co-borrowers.

Conventional loans

Fannie Mae and Freddie Mac allow non-occupant co-borrowers. When using a conventional loan, the co-signer is required to sign the loan but does not need to be on the property title. His or her credit will be pulled, and that score will be used — along with the primary borrower’s credit — to determine loan qualification.

Program rules are as follows:

A minimum FICO score of 620-640 is required*
The primary borrower must show a qualified income
Both borrowers need to meet lending guidelines set by Fannie Mae and Freddie Mac

With Freddie Mac’s Home Possible loan, non-occupant borrowers can contribute to some of the down payment.

*FHA, VA, Conventional, and USDA loan requirements are subject to change. Non-QM loans may be temporarily unavailable. As a result of COVID-19, mortgage investors are unable to support as many loans, meaning underwriting guidelines for government and conventional loans are becoming more strict.

FHA loans

FHA loans have similar rules for co-signers, with the addition of a few more guidelines. For example:

There’s a maximum of using two non-occupying co-borrowers (who live in the U.S.)
The property must be a single-family home
The non-occupant co-borrower must be a relative (parent, grandparent, child, sibling, aunt/uncle, spouse/domestic partner, or in-laws)
If a non-occupant co-borrower is not related to the primary borrower by blood, marriage, or law, then a 25% down payment is required
The co-borrower’s name must be on the title

Tax implications

Tax advantages are available to mortgage co-borrowers via the mortgage interest tax deduction. However, co-signers are not eligible for the benefit since they do not hold ownership in the home.

Tax liabilities are possible if the primary borrower defaults on the loan. The lender will require the co-signer to settle the mortgage. Given you likely have your own mortgage and major bills to pay, this could prove challenging. You could be looking at debt forgiveness, which would need to be reported to the IRS and would show up on your tax returns, not to mention as a negative mark on your credit report.

Can a co-borrower be removed from a mortgage?

Whether you’re finding a co-borrower or acting as one, it doesn’t have to be permanent. You can always refinance your home down the road and add or remove co-borrowers or co-signers from the mortgage and/or title. It comes at a cost, but it is a possibility.

Before deciding for or against a mortgage co-borrower, you'll want to clearly understand all benefits and risks. Your relationship, credit report, and finances can all be affected by this decision. Be sure to consult with a lender to understand what makes the most sense for your financial situation.