A co-applicant is an additional person considered in the underwriting and approval of a loan or other type of application. Applying for a loan with a co-applicant can help to improve the chances of loan approval and also provide for more favorable loan terms. A co-applicant may become a co-borrower once the application is approved and funded.
Key Takeaways
- A co-applicant is a person who joins in the application for a loan or other service.
- Having a co-applicant can make an application more attractive since it involves additional sources of income, credit, or assets.
- A co-applicant has more rights and responsibilities than a co-signer or guarantor.
Co-Applicants vs. Co-Signers
A co-applicant is an additional applicant involved in the loan underwriting and approval process for a single loan. In some cases, a co-applicant may be considered secondary to a primary applicant.
A co-applicant differs from a co-signer or guarantor in terms of the rights associated with the loan. A co-signer may be used to help a primary applicant receive more favorable loan terms. However, they are generally not given access to the funds or associated with the collateral involved. Thus, a co-signer only serves as a secondary source of payment in support of the borrower. Meanwhile, co-applicants share in the transaction itself.
| Co-applicant vs. Co-signer | ||
|---|---|---|
| Co-applicant | Co-signer | |
| Applies for credit | Yes | Yes |
| Income & credit history considered | Yes | Yes |
| Helps with loan approval | Yes | Yes |
| Can access the loan funds | Yes | No |
| Responsible for repaying loan | Yes | If borrower defaults |
Applying With a Co-Applicant
There are several reasons that a borrower might choose to apply with a co-applicant. A co-applicant may be a family member or friend willing to help the borrower obtain funds for a loan consolidation or vehicle purchase. In many cases, a mortgage loan will include co-applicants who plan to purchase a home together. A commercial loan can also include co-applicants who are cooperatively involved in financing or a real estate deal.
Typically, a standard credit application is required for both borrowers when applying with a co-applicant. The underwriter will review the credit scores and credit profiles of both applicants in their approval decision. Your credit score represents your own personal credit rating based on your credit history, that reflects your creditworthiness.
Adding a co-signer with a good credit history and income can help boost your odds of getting approved for a loan since it can increase the lender's confidence that the loan will be repaid.
Benefits of a Co-applicant
Typically, the loan or credit terms will be based on the credit information of the highest quality borrower. At the very least, having a co-applicant with a high credit score and a long, positive credit history can lead to more favorable lending terms for the second applicant or borrower.
A borrower with good creditcan help an applicant with poor credit or no credit history get approved for a loan. Having a co-applicant with a strong credit history can also lower the loan's interest rate and help a borrower get approved for a higher loan amount—called the principal. For those looking to buy a home, a co-applicant with a high credit score can help a borrower afford a home with a higher value, provided they have the income to make the payments.
Co-Applicant Example
Let's say a married couple co-apply for a mortgage loan. Both applicants have excellent credit and are approved for a loan principal that is nearly twice the amount they would have obtained on their own. The co-applicants get approved for the mortgage, and they purchase the home. In return, the applicants must repay the loan principal plus interest. After the loan has been paid off, both applicants will be named on the title of the house.
Does My Co-Applicant's Credit Score Impact Approval?
Yes. A lender vets a co-applicant by the same standards as the original applicant, meaning they need a positive credit history, good credit score, and stable job history to get approved.
Does the Co-Signer Own Whatever They Sign For?
No. A co-signer takes financial responsibility for a loan but doesn't have rights to the proceeds. For example, if someone co-signs for a car loan, they must make payments if the original borrower cannot. However, they are not entitled to drive the car.
Is a Spouse Automatically My Co-Applicant If I Apply for a Mortgage?
No. You can apply for a mortgage using only the strength of your own credit. You may want to apply individually if your spouse has a poor credit history. However, you may qualify for a higher balance if you both apply together since lenders consider the income of both applicants when approving a mortgage.
The Bottom Line
A co-applicant can increase your chances of credit approval with more favorable loan terms, such as a lower interest rate and higher loan amount. If you need to improve your loan approval odds, a co-signer with a good credit history may suffice.
Article Sources
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Chase.com. "Co-Borrower Vs. Cosigner: Exploring the Differences."
Federal Trade Commission (FTC). "Cosigning a Loan FAQs."
Consumer Financial Protection Bureau. "Why Would I Need a Co-Signer for an Auto Loan?"
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