Qualifying for a loan is sometimes easier said than done. Just because you need a mortgage to buy your first home, or a personal loan to consolidate and pay off credit card debt, doesn’t mean a lender is going to magically understand and give you the exact loan and interest rate you want.
Thankfully, if you’re struggling to qualify for a loan, you can have a friend or family member step in to help. Essentially, you can leverage their income, credit score, and financial history to help you get a loan that’s right for you.
The downside is that this type of borrowing (as in, borrowing money with another person) can get a little jargon heavy. “Co-borrower,” “co-applicant,” and “co-signer” are all terms that are going to come up. Here’s briefly what they mean:
A loan co-borrower basically takes on the loan with you. Their name will be on the loan with yours, making them equally responsible for paying back the loan. They will also have part-ownership of whatever this loan buys—for example, a co-borrower will own half of the home if you take out a mortgage with a co-borrower.
A co-applicant is the person applying for the loan with you. Once the loan is approved, the co-applicant becomes the co-borrower.
A co-signer can help you qualify for a loan, but isn’t your partner on the loan like a co-borrower. A co-signer’s financial history and credit score is factored into the loan decision, but they do not have ownership over the loan, and would only help make your loan payments if you were unable to make them.
We’ll dig a little deeper into co-borrowers and co-signers to help you decide which is right for you.
How does signing a loan with a co-borrower work?
Co-signing helps to assure lenders that someone will be able to pay back your loan. You typically use a co-signer with a stronger financial history than you, which can help you get a loan you might not qualify for on your own (or for better terms than you may qualify for on your own). Lenders might be more comfortable lending to you if your co-signer has a strong credit score and a dependable income, but loan underwriting criteria (that is, the personal financial factors used to determine who gets a loan at what rates and terms) differ from lender to lender.
For example, a parent with a stronger credit history might co-sign their child’s mortgage, allowing the child to get a lower interest rate on their mortgage than they would have on their own. The parent wouldn’t own the home, but they would have to make mortgage payments if their child couldn’t.
When might it make sense to have a co-signer rather than a co-borrower?
People typically consider a co-signer when they know they can’t qualify for a loan on their own, whether because they don’t have enough credit history, their credit score isn’t great, or they don’t earn enough to qualify for a desired loan (among other factors). A co-signer acts as a safety net if you’re unable to make payments on the loan.
When might it make sense to have a co-borrower?
Let’s go back to the example of a parent helping their child qualify for a mortgage loan. If that parent was a co-borrower instead of a co-signer, they would own the home with their child in addition to being equally responsible for the monthly mortgage payments.
Typically, spouses co-borrow when buying property, or if they are taking out a home improvement loan for a remodel. You and your co-borrower may qualify for a larger loan than if you were to take out a loan solo, and this way, you both own the investment and are responsible for loan payments.
The great thing is that some companies, like SoFi, now allow qualified individuals to co-borrow on low interest personal loans. That means you and your co-borrower (whether they’re your spouse, friend, or a member of your family) may be able to qualify for an even better interest rate and fund your financial goals that much more easily.
It is a big decision to take out a loan, so it may be a good idea to make sure that your co-borrower and yourself are 100% ready to take on this financial commitment. Both of you will be on the hook for payments, therefore, creating a plan of action for paying off the loan could potentially help.
SoFi Mortgages not available in all states. Products and terms may vary from those advertised on this site. See SoFi.com for details.