Difference between a Co-Signer, Co-Borrower, and Guarantor

• Co-borrowers are jointly getting the loan with the primary borrower.
• Co-signers support the loan and have ownership of the asset.
• Guarantors support the loan without ownership of the asset.

If you’re considering buying a home right now, it is likely that you won’t qualify for the home that you want or need. Of course, you shouldn’t buy more house than you can afford, conventional wisdom says your mortgage payment needs to be 30% or less of your pay, but that isn’t the only factor in qualifying for a home.

If you struggle to qualify because of age, low or poor credit, job history, or unproven income, then you might need help getting a loan. But, that's the problem. What kind of help do you need? Do you need a co-borrower? A co-signer? Or is it a guarantor? What is the difference?

In this article, we will explore the subtle differences between co-borrowers, co-signers, and guarantors, examples of why you might need them, and the pros and cons of each. While we’ll be using a mortgage as our example, these principles apply to other loans as well, including personal loans and auto loans.

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Co-Borrower

A co-borrower is someone who is getting the loan with you. Since you are co-borrowing you are borrowing together. You have equal responsibility for the repayment of the loan and, usually, equal ownership of the asset as well. A co-borrower’s credit and financial history are run just as vigorously as the primary borrower’s history and their credit is viewed together as a complete picture. A co-borrower with better credit or financial stability can help the primary borrower to qualify for the loan.

When to have a co-borrower

A co-borrower is intimately involved with the loan. That means if you just need help qualifying for a mortgage, having the person helping you act as a co-borrower is usually not recommended. There are two main reasons that you will have someone as a co-borrower.

1. You are in a close relationship or partnership. Spouses and couples who are purchasing a house together usually purchase as co-borrowers. If one has a bad financial history, they may be able to opt out of being a co-borrower, but then the loan depends entirely on their partner. Also, if you are purchasing real estate as an investment, you will often co-borrower with a partner so you both have joint ownership of the property.
2. If the person you are co-borrowing with wants more control. When someone is a co-signer or a guarantor, they have less control over the asset. A co-borrower will have the power to make payment, dispose of the property as they see fit, and make more from the proceeds of the sale of the property. This is a way of guaranteeing that your co-borrower will have some repayment if things go sideways and the asset must be sold.

Pros of a co-borrower

• They have more control over the asset and loan.
• You can increase how much you qualify for.
• It is good for people with joint finances.

Cons of a co-borrower

• The credit of both applicants is affected equally.
• The co-borrower is on the hook for payments before the primary borrower is delinquent.
• The co-borrower must own part of the asset, which might not be ideal.

Co-Signer

Co-signer might be the most confusing term in any financial transaction. When renting, a co-signer is basically the same as a co-borrower, in mortgages the co-borrower is often referred to as the co-signer, a non-borrowing spouse could also be called a co-signer, and an actual co-signer means something different.

A co-signer is a step down from a co-borrower because their name is not on the mortgage. Since being a co-signer is such a muddled term, the co-signer may or may not help you qualify for the loan. Their credit may or may not be run as part of the transaction. But no matter what, a co-signer is on the title.

For our purposes, if you want help qualifying for a mortgage, a co-signer is someone who is put on the title, but the home is not their primary residence. This means that their financials will help you to qualify for the loan, but they become liable to pay the loan in default. This is the most common route people take when adding someone to their mortgage to get help qualifying.

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When to have a co-signer

The main reason to have a co-signer is when you can’t qualify for a mortgage on your own. Adding a co-signer can boost your financials, whether you have low credit, short job history, inconsistent work, etc. Usually, this is a parent signing for a child to purchase their first home. If you cannot qualify on your own you will most likely need a co-signer, but it is important to check if your bank will allow a guarantor first.

Pros of a co-signer

• Can help you qualify for the loan.
• The co-signer doesn’t have to live in the house.
• Co-signing is an accepted process that most banks except.

Cons of a co-signer

• The co-signer is still on the title, which has tax and other consequences.
• The co-signer must sign off on all transactions, including refinances, involving the asset.
• The co-signer’s credit may be affected by the primary signer’s delinquency.

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Guarantor

A guarantor is the least intrusive option for adding someone to your mortgage. The guarantor states that in the event of default they will assume responsibility for the mortgage. This is an important distinction because it shelter’s the guarantor’s credit from the loan’s default. Once again, this term can become muddled and lenders may refer to a co-signer as a guarantor, but a true guarantor has very little credit involvement in the transaction and does not have to be on title. Even with this, the guarantor can help you qualify for a loan. That means a guarantor is the least risky way of adding someone to your loan. The problem is a guarantor isn’t always allowed by a lender. It is important to do your due diligence on this when trying to get a loan.

When to have a guarantor

If someone is willing to help you qualify for a loan but wants to take on the least risk possible, the guarantor is the best option. It has the least credit, tax, and other implications for them. If the only thing you need is help qualifying, then a guarantor is probably the best option.

Pros of a guarantor

• Can help you qualify for the loan.
• Not on the title.
• Minimal impact on the guarantor.

Cons of a guarantor

• Fewer protections for the guarantor since they don’t own the asset.
• Can’t access the loan until it is in default.
• Not always an available option.

Recommended Reading: Five Tips for Buying Your Dream Home

The Money Wrap Up

The type of partner you have depends on how involved you want someone to be in your loan. A co-borrower means that person got the loan just as much as you. A co-signer puts the person in the second position on the loan, giving them less responsibility for the loan, but they still have risk and ownership in the asset. A guarantor is never involved unless the loan goes into default so it is a good way to help someone qualify while minimizing risk. Depending on your preferences you can now choose the best option for you when getting a loan.

Which option is best for you? Comment below.

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