If credit, borrowing history, or debt-to-income ratios are issues in acquiring a conventional mortgage, or if the borrower is interested in securing a lower interest rate, a co-signer or co-borrower might be a solution to obtain the necessary lending to purchase the property. A co-signer guarantees the loan by vouching for the primary borrower. They are not equally responsible for the loan, but usually only responsible for making payments if the primary borrower defaults.
If the parent co-signer does not make the payments, their credit could suffer. The parent co-signer also has no ownership interest in the property and has no power to sell the property. The co-signed mortgage increases the parent’s debt, which could make it more difficult for a parent to borrow, if their debt-to-income ratio becomes too high.
Co-borrowers have an ownership interest in the property. All co-borrower names are included on title and they are entitled to and are able to leverage equity they build in the home over time. Although a co-borrower takes on the risk of having to make the full mortgage payment alone if there is a default, they are not expected to make regular mortgage payments each month.
https://www.rocketmortgage.com/learn/coborrower-vs-cosigner#:~:text=The%20Bottom%20Line,in%20the%20property%20you%20buy
Here are the key differences between co-signers and co-borrowers, summarized by BNL Appraisal.
| Aspect | Co-Signer | Co-Borrower |
|---|---|---|
| Liability | Responsible for loan if primary borrower defaults | Equally responsible for loan payment |
| Ownership | No ownership rights to the asset being financed | Shares ownership rights to the asset being financed |
| Credit Impact | Loan appears on co-signer’s credit report | Loan appears on both co-borrower’s credit reports |
| Income Consideration | Co-signer’s income may not be considered for loan eligibility | Both co-borrower’s incomes are considered for loan eligibility |
| Lender’s Assessment | Co-signer provides additional security for the lender | Co-borrowers provide combined creditworthiness for the lender |
https://www.bnlappraisal.com/blog/co-signer-vs-co-borrower
In a co-borrower arrangement where joint ownership is being contemplated, there are other important considerations that need to be addressed. For example, how will the property be owned: joint tenants with rights of survivorship (JTWROS) or tenants in common (TIC)? JTWROS ownership is where two or more people equally own the property and have the right to survive each other. When an owner dies, their share of the property automatically passes to the other owner(s). A property owned jointly in a TIC arrangement typically does not include a right of survivorship, meaning when one owner dies, their share passes to their beneficiaries or heirs as specified in their estate plan.
Other than ownership structure, there are additional questions to contemplate when joint ownership is being considered:
- What are each owner’s specific responsibilities related to the obligations of the property, such as with insurance, property taxes, utilities, homeowners’ association dues, or maintenance projects?
- Because both parties will likely have a 50% ownership interest in the property (whether it is JTWROS or TIC), will each party enjoy in the capital appreciation of the property, even if one party is paying the monthly mortgage? Or does this depend on the total involvement of each party after an agreement is executed?
- What is the expectation of each party regarding an exit strategy? Will the property be refinanced or sold at some point? Will there be an obligation to do so?
- Is one of the co-owners already married? What happens in the event of a marriage, divorce, or death?
When answering these questions (and others), a separate operating agreement between the co-owners can be created to address the agreed upon terms of the parties. It is a good recommendation to have one so that if there is ever a dispute, a document exists to govern the situation and dictate a previously agreed upon outcome.