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Purchasing a new home is often a challenging step for some people. Possibly a bad credit history is hindering you from taking the plunge to home ownership. Other people don’t have enough credit history established to get a loan.
Other individuals may have acceptable credit but plan to own the house with another individual such as a spouse. They may intend to repay the house together. Sometimes two people applying for a loan is more advantageous than just one person is.
Often, people have either a co-borrower or co-signer on their mortgage loan. Although these two terms may sound somewhat similar, they are entirely different. Each one serves a different purpose. Before you take the step of buying a new home, learn about the pros and cons of co-borrowers and co-signers.
What is a Co-Borrower?
A co-borrower is a person who borrows money with another person. A co-borrower plans to repay the loan along with the other person, and he/she also has a stake in the ownership of the property. A co-borrower is invested in the property just as much as the borrower.
When Should I Get a Co-Borrower?
If you and another person such as a spouse are buying a home together, then a co-borrower is usually a good idea. Your lender will take credit and income information from both parties when assessing the loan application. This allows most people to qualify for a more substantial loan amount since the lender will consider both incomes.
Having a co-borrower may also help with some people who don’t earn enough on their own or who have shaky credit. Another benefit of getting a co-borrower is that you may get better terms than if you were to apply on your own. For one reason, the underwriter uses the best credit profile of the two borrowers when determining the terms. Lenders also feel more secure when you have a co-borrower signing the mortgage loan with you.
Another reason some people have a co-borrower is that they are going into business together, and they plan to use the property for business.
Keep in mind that a co-borrower will be a co-owner to the property with their name appearing on the mortgage title, and he/she will be expected to help repay the loan. If one borrower defaults and files bankruptcy, the other borrower is protected under the bankruptcy filing.
What is a Co-Signer?
A co-signer shares some similarities with a co-borrower, yet with some distinct differences. A co-signer signs a mortgage loan with you, but they do not repay the loan with you. However, they do have to take responsibility if you ever default on the loan. Their primary purpose for being a co-signer is to vouch for you. In other words, they serve as the backup payer.
Borrowers who would otherwise not be able to get a loan due to poor credit or no credit can benefit from a co-signer. A co-signer serves as a credit backup because lenders usually look at the co-signer’s credit report versus the borrower’s credit.
Co-signers do not make payments on the loan as a co-borrower does, but they must promise to repay the loan if the borrower fails to do so. The co-signer, however, does not have any ownership in the home.
Co-signers do take on a risky endeavor if they decide to co-sign for someone else. They must have a good deal of trust that the person will pay the loan back, or they must be willing and capable of repaying the loan themselves if something were to happen. Even if the borrower files bankruptcy, the co-signer is still liable for the loan.
When Should I Get a Co-Signer?
People usually choose to get a co-signer because, without one, they won’t be able to get the loan. A co-signer is ideal for individuals with a negative issue on their credit history or a low credit score. It’s also helpful for individuals who are just starting out who haven’t built up any credit yet such as recent student graduates.
Are There Any Cons to Getting a Co-Borrower or Co-Signer?
For the person serving as a co-signer, there can certainly be some downsides if the borrower fails to follow through with payments. Not only will the co-signer be responsible for repaying the loan, but his or her credit will take a hit, too.
A co-borrower doesn’t have quite the same problems as the co-signer. They have an investment in the home since they’ve been paying on the loan, and their name is on the loan as well. If something goes wrong, it’s usually a joint decision between both borrowers. As stated above, the co-borrower has protection in the event of a bankruptcy.
Deciding whether to use a co-borrower or co-signer is an important decision. Your trusted real estate agent can guide you through the decision-making process. Get in touch today!