Co-Borrower

A co-borrower is one of two or more people who apply for credit together and are each liable for repaying it. In the language of Regulation B, the federal rule that governs credit applications, a co-borrower is a "joint applicant," meaning "someone who applies contemporaneously with the applicant for shared or joint credit," and ordinarily each is "contractually liable," which the regulation defines as "expressly obligated to repay all debts arising on an account by reason of an agreement to that effect."

The term overlaps with others, and usage varies. The Consumer Financial Protection Bureau's mortgage glossary has a single entry for "co-signer or co-borrower," describing someone who "agrees to take full responsibility to pay back a mortgage loan with you," and notes that some mortgage programs distinguish a co-signer as someone with no ownership interest in the home. The federal definitions of a cosigner turn on a different point: a cosigner takes on the debt without receiving the money, goods or services, while a co-borrower applies for credit that both will share. Co-applicant is another name for the same role at the application stage.

Intent is shown at the start. Regulation B's commentary says that "a person's intent to be a joint applicant must be evidenced at the time of application," and that signatures on a promissory note "may not be used to show intent to apply for joint credit." The rule exists because of the regulation's limit on extra signatures: if you qualify on your own for the credit you asked for, a lender may not require anyone else's signature, other than a joint applicant's. So a joint application has to be a choice the applicants made, not a condition the lender added afterward. A lender also may not treat joint applicants differently because they are, or are not, married to each other.

Why lenders combine the applicants. Underwriting looks at income, debts and credit history, and a second applicant's income can bring a debt-to-income ratio within the lender's limits. The lender reviews each applicant's credit history as well. Some programs add conditions when a co-borrower will not live in the home. Fannie Mae's Selling Guide, for example, caps the loan-to-value ratios on a manually underwritten loan at 90% where a co-borrower who will not occupy the property supplies qualifying income, though the combined ratio may reach 105% when a Community Seconds loan is part of the transaction.

What it does to the credit file. A co-borrowed loan is a debt of each borrower. The CFPB warns that a co-signer's or co-borrower's "credit record and finances are at risk" if the loan is not repaid, and a missed payment shows up for both. The debt also counts against each person when either later applies for other credit.

What it does not settle. Liability on the note and ownership of the collateral are separate. Fannie Mae describes non-occupant borrowers as people who "may or may not have an ownership interest in the subject property as indicated on the title." Who owns the property is decided by the deed or title, and the form of ownership, such as joint tenancy, is a separate choice.

Getting off the loan. Because each co-borrower is contractually liable for the whole debt, the liability is joint and several, and a private agreement between them, including a divorce decree, does not release either one from the lender. Leaving a joint loan takes the lender's agreement, such as a release or a refinance in the remaining borrower's name, or paying the loan off.

Co-borrowers fill out one application, or linked applications, showing that they are applying together. The lender pulls each person's credit, verifies each person's income and debts, and decides on the combined picture. If approved, both sign the loan documents and both are obligated for every payment.

Take an example. Jamal wants a mortgage with a payment of $2,100 a month. He also pays $400 a month on a car loan, so his monthly debts would total $2,500. On his own pre-tax income of $5,000 a month, that is a debt-to-income ratio of 50% ($2,500 ÷ $5,000). His sister Leila applies with him as a co-borrower. She earns $3,500 a month and has no debts. Combined, their pre-tax income is $8,500 and the debts are still $2,500, for a ratio of about 29% ($2,500 ÷ $8,500). The lower ratio may let the lender approve a loan it would decline to Jamal alone.

The cost of that help is Leila's exposure. If Jamal stops paying, the lender can pursue Leila for the full balance, and the late payments appear on her credit report. Whether she is also on the deed is a separate decision they make at closing.

Pros

• Combining incomes can qualify the pair for a larger loan, or better terms, than either could get alone.
• Both borrowers build credit history from on-time payments on the shared account.
• The role is chosen at application, which Regulation B protects: a lender may not require a second signer from an applicant who qualifies alone.

Cons

• Each co-borrower can be required to pay the entire debt, including the share the other was supposed to pay.
• A late payment by either damages both credit reports.
• The debt counts against each co-borrower's debt-to-income ratio when either applies for other credit.
• Getting off the loan later takes the lender's agreement or a payoff, not just an agreement between the borrowers.