Co-borrowers and cosigners are both responsible for loan repayment, but a co-borrower has shared ownership of the asset, while a cosigner does not.
If you’re a real estate student, you must understand the difference between a primary borrower, a co-borrower, and a cosigner. As a real estate teacher, I’ve noticed that most students think that the co-borrower and cosigner have the same duties. However, these are two completely different terms.
In this post, I’ll explain the difference between primary borrowers, co-borrowers, and cosigners. Understanding these terms will help you with your real estate exam.
What Is a Primary Borrower?
A primary borrower is the main applicant in the loan.
To apply for a loan, sometimes a primary borrower needs help from a cosigner to qualify for the loan. In this case, the primary borrower is still responsible for making the monthly payments. Plus, only the primary borrower has the access to the funds, or in the case of a property, only they hold ownership.
For co-borrowing, the primary borrower can request someone else to share the debt. In this case, the primary is not the only one to hold the title of the property or access the funds. The primary borrower and co-borrower will both make payments to the lender. Plus, both will have equal access to the funds or, in the case of a mortgage loan, hold equal ownership of the property.
What Is a Co-Borrower?
A co-borrower is also known as the co-applicant or joint applicant. They share equal responsibility for making payments on the loan as the primary borrower. They also have equal access to the funds as the primary borrower. When the primary borrower submits a loan application along with the co-borrower, the lender will have multiple sources of income towards the loan repayment.
An applicant with a co-borrower is considered less risky, and they can get more significant loan amounts. In the case of a mortgage, the primary borrower and co-borrower both own the home. Both borrowers will be listed on the home’s deed.
There are certain risks involved in co-borrowing. For instance, both co-borrowers are liable for paying the debt; if one of them misses the payment, it can hurt both co-borrowers credit scores. Plus, if one of the borrowers defaults on the loan, it could hurt their relationship.
What Is a Cosigner?
A cosigner promises to be responsible for making payments on the loan if the borrower misses payments or defaults on it. A cosigner usually has better credit scores and is more financially stable than the borrower. Thus, the cosigner can help the borrower qualify for the loan because of their creditworthiness.
The cosigner can also request a release from the loan documents at any time during the loan term. However, the primary borrower must agree to release the cosigner. In some situations, the cosigner can get a release from responsibility after the primary borrower has made certain payments on the loan.
Another way to remove the cosigner’s responsibility from the loan is by refinancing the loan. When a borrower has improved their credit scores, they can refinance the loan and release their cosigner.
There are a few risks involved with cosigning. It is riskier than co-borrowing. A cosigner doesn’t have ownership or title of the asset or the property. They don’t receive the funds from the loan, but the lender will come to them if the primary borrower defaults on the loan. Even if the borrower doesn’t default, missed payments can hurt the cosigner’s credit history.
What Is the Difference Between a Co-Borrower and a Cosigner?
Co-borrowers and cosigners both are liable to repay the loan, but a co-borrower has a share in the asset or funds, and a cosigner does not.
Co-borrowers take the shared debt with other people and make repayments; they have equal access to the funds obtained from the loan as the primary borrower.
The co-borrower and the primary borrower are both equally responsible for the monthly payments on the loan. On the other hand, a cosigner is only liable to make payments if the main borrower defaults on the loan. A cosigner is often needed when the borrower has a bad credit score or weak financial position. Thus, such a borrower needs a cosigner to qualify for a loan.
Differences Between Co-Borrower and Cosigner
The following are the main differences between a co-borrower and a cosigner:
|Name Present on the Loan Title||Signs the loan agreement||Responsible for making payments on the loan||Shares the Assets and Funds||Takes the Financial Risk|
|Cosigner||No||Yes||No, unless the primary borrower defaults on the loan||No||Yes|
The main differences between a co-borrower and a cosigner are listed above. In the case of a mortgage, home title will belong to the co-borrower and the primary borrower. However, if the primary borrower has a cosigner, title only belongs to the primary borrower. When it comes to signing the loan agreement, whether it’s a co-borrower or a cosigner, both have to sign it.
Co-borrower and cosigner are terms used to indicate the degree of investment of other people in the loan. Sometimes the borrower can add either a co-borrower or a cosigner to their loan agreement. Adding a co-borrower or cosigner is mostly done when the borrower can’t pay the entire loan alone.
A cosigner’s job starts when the primary borrower defaults on the loan; otherwise, they don’t share the assets and funds and are not responsible for making payments.
Co-Borrower vs Cosigner Examples
Example (Cosigner): Suppose David wants to purchase a home. He has a credit score of 560, which is considered bad credit. He wants to purchase a property for $150,000, but no lender is ready to provide a mortgage because of his bad credit history. A loan officer suggests he finds a cosigner so that he qualifies for the mortgage and purchases the home. David requests his brother, who has a good credit score of 700, to become a cosigner.
His brother, John, becomes a cosigner, and David qualifies for the loan. David pays $30,000 and gets a mortgage of $120,000 from the lender. Following are the details of the mortgage:
- Mortgage balance: $120,000
- Interest: 5%
- Mortgage term: 20 years
- Monthly loan payments: $1,075.28
David now owns the property and makes monthly payments of $1,075.28. He has to make these payments for 20 years until he can ultimately pay off the loan and own the property. His brother, John, has no ownership of the property; he just helped David qualify for the mortgage. After 10 years, David still has a $74,184.98 mortgage balance.
At this time, David loses his job, and he’s unable to make payments on the mortgage. After three missed payments, the lender contacts John, the cosigner. John’s credit has already suffered due to missed loan payments on the mortgage. John agrees to make the remaining payments on the mortgage until David finds a new job and repays the remaining mortgage to the lender.
Example (Co-borrower): Suppose Tom and his wife Sally want to purchase a home. Both are employed and have a stable monthly income. They decided to purchase a home that cost $200,000. To purchase the home, they have to apply for a mortgage. Tom and Sally decide to apply for a mortgage together as co-borrowers. They easily got loan approval for the mortgage, and the following is a breakdown of the mortgage:
- Mortgage: $200,000
- Down payment: 20%
- Mortgage balance: $160,000
- Interest: 4%
- Mortgage term: 30 years
- Tom’s monthly payment: $523.6
- Sally’s monthly payment: $523.6
- Total Monthly payments: $1047.20 (Tom and Sally’s combined)
Tom and Sally both have to contribute equally to the monthly payment on the mortgage. Plus, Tom and Sally both hold titles in the property. At the end of the mortgage term, Tom and Sally will have contributed equally to the mortgage payments, and they’ll own the property equally.
Frequently Asked Questions
When Is Co-borrower a Good Option?
Co-borrowing is suitable when both borrowers decide to benefit from the loan. For instance, if two people want to buy a home, they might take out a mortgage as co-borrowers and then work together to make monthly payments. Both borrowers benefit from the mortgage, and the payments are split.
This option is suitable when the borrower wants to qualify easily and get good rates and terms on a mortgage. Besides that, they can also benefit from a higher loan limit. This is also a good choice if both persons want to be the owner of a home or an asset.
When Is Cosigner a Good Option?
Co-signing is a good option when only one borrower wants to benefit from the loan funds. In the case of a mortgage, it is suitable if only one person wants to hold the title of the home. This option is suitable for someone who is young and doesn’t have good credit to qualify for a loan.
Such a borrower can take the help of a cosigner who can guarantee the mortgage. The lenders approve loans when they see the creditworthiness of a cosigner. The risk of the loan reduces when there is a co-signer. Most times, a close relative, family member, or parent is the cosigner because they take responsibility for the loan and reduce the risk for the lender.
What to Know for the Real Estate Exam
If a person is looking to obtain a mortgage, they may need to find a co-borrower or a cosigner. Adding any of these can improve the borrower’s mortgage candidacy and help in sharing financial responsibilities.
After reading this post, I hope you can easily differentiate between the two terms. If you have difficulty understanding other terms, go through this easy-to-learn Real Estate Vocabulary Guide.