When you look into the history of debt, there’s a surprisingly long history of time where the concept was quite simple. Ignoring a few obvious exceptions (i.e the Byzantine Empire), most places had rather simple rules - borrow commodities, return them with value on top of them. This rather simple process worked, for the most part.
It wasn’t until fiat currency and the industrial revolution that the game really changed. Debts and loans became infinitely more complex with a number of different instruments to accomodate a number of different types of uses.
That’s a long-winded way of saying: if you’re feeling dazed or confused about all the terms related to taking out a loan, don’t worry, you’re not alone.
Among the deluge of different terms, one of the most common frequently discussed and cited is that of a “co-borrower.” Nobody knows about co-borrowing more than Cher, a site that helps you find co-owners for your future home. We’ll help you find you co-owners and others who like the same home as you, making the search easier than ever.
This article aims to shed light on the concept, how it differs from the oft-confused “cosigner” and the benefits and drawbacks of having one on a loan application.
What is a Co-Borrower?
A co-borrower is another borrower added to a loan application. Co-borrowers are typically included in one of two scenarios: either a) the loan is used in the acquisition of an asset with multiple ownership (i.e a married couple buying a house), or b) a situation wherein a co-borrower can help an individual apply for a loan they wouldn’t otherwise get (i.e a parent helping a child with a first home)
Co-Borrower vs. Cosigner: What's the Difference?
The difference between a co-borrower and a co-signer ultimately boils down to ownership. A co-signer takes responsibility for a debt in the event the borrower can’t pay it back - however, they don’t have any ownership in the loan or subsequent asset.
This is also a step away from another oft-confused title “guarantor” - a guarantor, different from a cosigner, is only on the hook for payment if the borrower defaults and is completely unable to pay.
Who Can be a Co-Borrower?
A co-borrower is somebody who is equally liable for the debt, and is equally responsible for payments. Co-borrowers are almost exclusively close family - spouses or parents. The reduced risk profile on a mortgage with co-borrowers, for instance, takes into account the benefits of a married couple’s joint income, which in theory should reduce the risk of having it paid back.
It’s uncommon for someone unrelated to be accepted as a co-borrower. Typically friends or distant relatives who want to help with a loan do so as a co-applicant (similar to a co-borrower, albeit with a higher risk profile and usually higher interest rates), co-signer or a guarantor. If you’re looking for a co-applicant instead, sign up for Cher today.
How do Lenders Consider Co-Borrower's Credit?
To understand how borrowing decisions are made in a co-borrowing agreement, it’s important to first understand DTI, or, debt-to-income-ratio. Your DTI is generally the #1 factor in assessing your mortgage application, and typically a bank averages the DTI of all co-borrowers to determine whether to pay out a loan. In other words, as long as both co-borrowers weigh to a DTI above the bank’s threshold, the loan is agreeable.
Beyond that, banks typically have their own processes for assessing credit and risk profiles. Spouses, as mentioned, are typically more favourable risk-wise because both credit profiles are considered and offers a mitigation strategy for defaulting.
Benefits of a Co-Borrower
More favorable terms
The #1 benefit of having a suitable co-borrower on a loan application is to present a lower level risk and receive the same loan on significantly more favourable terms. A co-borrower is one of the biggest reasons why marriage is consistently rated as a financially positive decision - it makes it easier to take out loans, and…..
It’s easier to pay back loans
Life (and income streams) are unpredictable. Having a co-borrower offers you a mote against recessions, career changes & “acts of God.” This is a big reason why co-borrowing lowers rates in the first place - banks see it as the ultimate hedge against the bad times.
Drawbacks of a Co-Borrower
Unbalanced credit profiles
If one borrower has significantly worse credit credit or a DTI ratio, the other borrower will be signing up for a loan they could otherwise probably get on more favourable terms. This can be particularly challenging for spouses, wherein not including a spouse as a co-borrower for this reason isn’t acceptable because it relegates ownership to a single person.
The worst situation co-borrowers can find themselves in is in the event of loan liabilities where the personal relationship has degraded. This is partially why co-borrowing agreements are typically made only with spouses or very close family. In the event of a relationship being fractured, the co-borrowers are left on the hook for paying a liability off together.
Not to mention, ownership becomes a tricky challenge to navigate - particularly in a situation such as divorce. In drastic cases, a co-borrower might have to continue paying against a loan for an asset they no longer use or accrue benefits from.
Should You Consider a Co-Borrower?
Co-borrowing is not the only option anymore for exploring home ownership with others. In fact, friends are increasingly getting into properties together and more and more services, like Cher, are accommodating similar co-applicant agreements. A co-borrower or co-applicant can be an extremely helpful arrangement, and enable people to move into a dream property long before they would otherwise plan to - but it certainly has potential drawbacks to be aware of as well.
The most important thing is to understand as much about the process as possible, read the literature, and if possible, consult with experts to understand your options before moving forward.
If done correctly, however, co-borrowing on a property can bring tremendous value into a person’s life - both financially, and personally.