Mortgage Co-signer vs Co-borrower: What’s the Difference?

mortgage co-signer

If a bank is on the fence about approving a loan, they may ask the borrower if there is anyone who can share responsibility of the loan. Including multiple people on your loan application can increase your chances of getting the loan accepted. While many people think co-signers and co-borrowers are the same thing, these are two very different roles in the eyes of a lender. To decide which option is best for you and those helping you get the loan, it helps to compare the two roles.

A co-signer is someone who guarantees a loan for someone else. This means that the co-signer is agreeing to take responsibility for paying off the loan in the event the primary borrower fails to do so. With more resources available to pay back the loan, the lender will be more confident in receiving payment. A co-signer does not have title or ownership over any items acquired with the loan.

A co-borrower is one of at least two primary borrowers. For example, if a couple is buying a home together, they can apply for a loan as co-borrowers. Like co-signers, co-borrowers are responsible for the loan even if the other primary borrowers do not meet agreed upon payments. Unlike co-signers, a co-borrower will have an ownership interest in the property being purchased.

While both a co-signer and a co-borrower can help you when it comes to qualifying for a loan, there are some differences in the risks associated with the responsibilities of co-borrowers and co-signers.

It is important to understand as a co-signer that you are essentially taking on an all risk, no reward deal in which you could be responsible for paying off a loan with no benefit to yourself. If you co-sign to help someone buy a car, it’s their car—and if they stop paying on the loan, it is your responsibility to pay for their car. More than just paying the loan balance and interest, you can also be charged for late fees and other charges if the primary borrower has stopped making payments. Co-signing can also negatively impact your ability to borrow or your ability to get preferable terms on new lines of credit.

For co-borrowers, the risk is a little more personal. Because you are combining financial resources with someone else, co-borrowing can allow you to get approved for a loan that is much bigger than you could pay by yourself. Tragic accidents, bad break-ups, and any other number of difficult circumstances can leave you with a loan that is outside of your financial capacity. It can be very difficult to remove someone’s name from a loan, forcing you to sell the shared property or go through a time-consuming refinance in order to pay off the loan.

The bottom line is if you need someone to co-sign or co-borrow in order to secure a loan, you need to make sure it is someone you trust. Communicate fully the responsibilities associated with each role and confirm they feel comfortable adding their name onto the loan application. Keeping up regular communication with this person about the status of the loan can ensure you are on the same page, which is important since they are invested in the mortgage, too.

Can I be Approved for a NJ Mortgage with a Bad Credit Score?

NJ mortgage

A lot of people with a bad credit score assume it is impossible to become a homeowner. A low credit score can definitely make it harder to get a new credit card or any type of loan, including (and especially) a mortgage loan. If the one thing standing between you and home ownership is your credit score, don’t give up hope. It is possible to get approval for a NJ mortgage with a low credit score.

What is considered a “bad” credit score to mortgage lenders?

Different lenders have different criteria for loan applicants. The lower your score, the more likely it is that potential lenders will see you as a risk. If your score is somewhere in the middle—between 620 and 740 (approximately)—there is a little more wiggle room. While you will likely face higher interest rates and be restricted in how much you can borrow, you should still be able to secure a mortgage loan without much issue. Generally, if your score is under 620, you will not be able to get a loan from a traditional lender. But that doesn’t mean you have no options for getting a loan; it just means you will have to go through less traditional lenders.

Private Lenders

One option for borrowers with low credit scores is to go with a private lender. Mortgages through private lenders often come with higher interest rates and more substantial minimum down payments for borrowers with bad credit. You also may have to do a little more work with a private lender, like providing additional paperwork that is typically not required with a traditional lender. It’s important to do your due diligence when going through a private lender. Shorter payback periods and higher interest rates can make it difficult to make your monthly mortgage payments. Make sure you will be able to make timely payments in full for the duration of the loan.

FHA Loans

Another possibility is a Federal Housing Administration (FHA) loan. If your credit score is at least 580, you can qualify for an FHA mortgage with 3.5% down. With a score between 500 and 580, you will need to put at least 10% down. The cutoff for credit scores with an FHA loan is 500. Downsides to an FHA loan include: high interest rates and a mortgage insurance premium of 1.75% as well as monthly insurance premiums. If you pay less than 10% of the loan for your down payment, you will have to pay these monthly insurance premiums throughout the life of the loan.

Mortgage Tips for Low Credit Score Borrowers

Sometimes it’s possible to make up for a bad credit score in other ways. You can offset the risk of the loan by offering to pay a bigger down payment. While first-time home buyers typically put down 6% or less, making a 20% or more down payment could encourage lenders to approve your application despite a poor credit score. Plus, the more money you put down, the lower your monthly payments will be.

Another option is to enlist the support of a co-signer. If you have a close friend or family member with a great credit score, they could help you secure a mortgage loan. This is not a commitment to take lightly, though. While the mortgage is in your name, the co-signer will be equally responsible for any payments. This means if you miss a payment, their credit will be negatively impacted. Working with a co-signer requires a lot of communication and trust.

#1 Way to Own a Home with Bad Credit

If your goal is to buy a property but your credit score is poor, the best thing you can do is take the time to rehab your credit score. The higher your credit score, the better chance you’ll have of working with a traditional lender. Working with a traditional lender means your down payment, interest rate and monthly payments will be lower. Regardless of your situation, Veitengruber Law can help you determine which path to home ownership is best for you.