A co-borrower is an additional borrower that appears on a loan with you.
What is a co-borrower?
A co-borrower is an additional borrower that is attached to a loan. The lender may designate both parties as co-borrowers or as one primary borrower and one co-borrower. The primary borrower may be the borrower whose name appears first on the loan or whichever borrower may have the higher income.
A co-borrower’s income and credit history are also used to qualify for the home loan. With two borrowers, both parties are obligated to repay the loan. If one borrower defaults, the other borrower is equally responsible for the repayments.
Both borrowers are considered owners of the property.
Benefits of a Co-Borrower
A co-borrower is advantageous, especially for a married couple, to take out a mortgage loan together. Because co-borrowers have an ownership interest in the property, if one borrower dies, the other borrower will continue ownership of the property, as well as the payments.
Another advantage to a co-borrower is the ability to help the primary borrower obtain a loan that they may not otherwise qualify for. With two borrowers, lenders review both sets of financial information.
Using the combined credit profiles and incomes, the borrowers may qualify for a more substantial principal amount. Additionally, they may also be eligible for a lower interest rate because the increased income level makes them more qualified and less likely to default on the home loan.
Limitations of a Co-Borrower
Because both borrowers have an equal ownership interest in the property, in the event that both parties want to go their separate ways, the loan and ownership rights would need to be addressed.
If the mortgage has been paid off, one member will need to relinquish ownership by being bought out or resolved in court.
If the mortgage is still active, the co-borrowers will need to pay off the debt, modify the mortgage, or undergo a legal debt-splitting process.
Co-Borrower Versus Co-Signer
A co-signer is similar to a co-borrower in the sense that he is liable to repay the loan if the primary borrower defaults. Both the co-owner and co-signer must sign all loan documents and are responsible for all the monthly payments.
Unfortunately, a co-signer does not have any ownership over the property. Instead, he is an additional repayment source or backup payer for a loan. The co-signer guarantees the loan and takes on the risks associated with a mortgage but does not have any ownership interest.
Co-borrowers are usually spouses or partners who agree to purchase a home together. A co-signer may be a parent guaranteeing a loan for his or her child.