When it comes to securing a mortgage, adding a co-signer or co-borrower can make a significant difference, especially if you’re looking to improve your chances of approval or qualify for better terms.
You may wonder, “Can my significant other and I buy a home together if we aren’t married?” The short answer is yes! However, it’s essential to understand the distinctions between co-signers and co-borrowers, who can fill these roles, and what responsibilities they each assume. Co-signers and co-borrowers take on financial obligations in different ways, so understanding the details before entering into such an agreement is crucial.
What is a Co-Signer?
A co-signer is someone who agrees to take responsibility for a mortgage loan alongside the primary borrower. While the primary borrower is responsible for making monthly payments, the co-signer is liable if those payments aren’t made. Co-signers act as a financial safety net for lenders, offering extra assurance that the loan will be repaid. Typically, co-signers are added when the borrower has a lower credit score, limited credit history, or insufficient income. By bringing in a co-signer with stronger financial credentials, the borrower may be approved more easily or secure better interest rates.
What is a Co-Borrower?
Unlike a co-signer, a co-borrower shares the responsibility for repaying the mortgage and ownership of the home. In this arrangement, both parties contribute to the loan payments, and the lender equally evaluates their financial details (credit score, income, and debt). Co-borrowers are often partners or spouses buying a home together, as both of their incomes and credit histories can be combined to secure a higher loan amount. Co-borrowers also share in the legal ownership of the property, meaning they each hold a claim to the home, while a co-signer does not.
Who Can Co-Sign or Co-Borrow a Mortgage Loan?
Theoretically, anyone with good financial standing can co-sign or co-borrow a mortgage loan. However, lenders tend to prefer certain relationships when it comes to co-signers and co-borrowers. Here are some common scenarios:
- Parents and Children
A parent is often the most common co-signer or co-borrower for a mortgage, particularly when helping their child purchase a first home. Parents may have the credit history and income to support their child’s mortgage application. However, parents should fully understand that their financial standing could be affected if their child misses payments.
There are many ways parents can help a child purchase a home that do not directly involve them co-signing. Parents can help with gift funds as well as gifts of equity – we break those in greater detail in How to Help Family Buy a Home.
- Spouses or Domestic Partners
Spouses and domestic partners frequently co-borrow mortgage loans together. In these situations, both incomes can be combined to qualify for a higher loan amount. Even if one partner earns more or has better credit, combining resources can secure better loan terms.
It’s important to note that you don’t need to be married to co-borrow a mortgage—any couple living together can apply jointly. However, if one partner is in a stronger financial position, they can apply as the sole borrower to secure the best mortgage terms. Even when one partner applies alone, both can still hold the title to the home.
Co-signing is also an option, but lenders may evaluate the finances of both partners if they apply jointly. Additionally, under the Equal Credit Opportunity Act, lenders cannot discriminate against applicants based on marital status.
- Siblings and Close Relatives
Siblings or other close relatives can act as co-signers or co-borrowers. Family members often want to help each other, and lenders are more inclined to accept close relatives as co-signers. However, both parties must trust each other fully and understand the risks involved. - Friends or Business Partners
Although less common, friends or business partners can co-sign or co-borrow a mortgage loan. This typically happens in joint real estate ventures or when individuals want to share property ownership. Lenders, however, may scrutinize these relationships more closely due to potential concerns about relationship dynamics.
What Do Lenders Look for in a Co-Signer or Co-Borrower?
Lenders have specific criteria for evaluating both co-signers and co-borrowers. They will typically assess:
- Credit Score: A higher credit score can help secure better rates and terms.
- Income: Lenders need to ensure that the co-signer or co-borrower can afford to cover the loan if necessary.
- Debt-to-Income (DTI) Ratio: Lenders prefer co-signers or co-borrowers with lower DTI ratios, as it indicates they are less burdened by debt and better positioned to manage additional financial responsibilities.
A cosigner or co-borrower can significantly improve a borrower’s lending eligibility by enhancing key financial metrics like income, credit score, and debt-to-income (DTI) ratio. When a cosigner is added, their credit score and financial history are considered, which can boost the overall creditworthiness of the loan application. This is especially helpful if the primary borrower has a lower credit score or limited credit history.
For a co-borrower, both incomes and financial profiles are merged, improving the DTI ratio, which is the proportion of monthly debt payments to gross monthly income. A lower DTI indicates a lower risk for the lender, making approval more likely and potentially allowing access to more favorable loan terms. Both co-signers and co-borrowers reduce the lender’s risk by strengthening the financial profile attached to the loan. Lenders want to confirm that both co-signers and co-borrowers are financially capable of taking on the mortgage and reducing the lender’s risk.
Important Considerations for Co-Signers and Co-Borrowers
While co-signing or co-borrowing can be a powerful tool to help someone qualify for a mortgage, both arrangements carry significant responsibilities. Co-signers and co-borrowers are equally liable for the debt, and any missed payments can negatively impact their credit. Before agreeing to either role, it’s crucial to evaluate the financial habits of the primary borrower and the potential long-term effects on your own financial situation.
Additionally, taking on these responsibilities may limit your ability to qualify for other loans or mortgages in the future, as the debt will appear on your financial profile. We dive a little more in-depth into whether it’s a good or bad idea to have a co-signer in our blog here.
Final Thoughts
Whether co-signing or co-borrowing, helping someone qualify for a mortgage can be life-changing. However, it’s essential for everyone involved to understand the financial obligations and risks. By carefully considering the potential outcomes and the commitment required, borrowers and co-signers can make well-informed decisions.
If you’re ready to get pre-approved to buy a home today – we can help. Reach out to one of our trusted loan advisors to get started.