Co-Signing A Mortgage Loan
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When you’re looking to get approved for a mortgage, lenders – as nesto, will scrutinize several aspects of your finances – like your employment, income, credit, downpayment, and debt ratio. Falling short in any one of these categories could mean the difference between approval and having your mortgage application denied. In some situations, like having poor credit, a mortgage co-signer could be a good way to improve your chances of approval. In this post, we’ll go through everything you need to know about co-signing for a mortgage in Canada: what a co-signer is; how it works; and whether or not it’s a good idea for both parties.
- A co-signer is someone who takes on responsibility for a mortgage or loan with the primary applicant
- When you co-sign a mortgage, you will be a part owner of the property, and your name will be on the title
- Co-signers are held responsible if the primary borrower can’t keep up with repayments
- A co-signer may also help you secure a more desirable mortgage, since they are taking on some of the risk
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What is a co-signer?
A co-signer is someone who takes on responsibility for a mortgage or loan with the primary applicant. A co-signer is usually someone close to the applicant – like a parent or spouse – who offers to co-sign an agreement as a way to minimize the lender’s risk, and potentially improve an applicant’s chances of getting approved. A co-signer will be a part owner of the property, their name will be on the title, and they will be held responsible if the primary borrower can’t keep up with repayments.
Cosigning a mortgage loan: what both parties need to know
Co-signing a mortgage is a big financial responsibility, and both parties need to know what they’re getting into. You should never co-sign for someone you don’t see as fiscally responsible, or stable enough to make their payments consistently. Conversely, if you’re looking for someone to co-sign for you, they will be assessed on the same grounds as the original applicant. They’ll need a solid credit history, stable income, employment, and acceptable debt ratios.
Consequently, the relationship between co-signer and co-signee needs to be built on trust and transparency. Here’s a few things to keep in mind if you’re planning on co-signing for someone:
Know your responsibilities as a co-signer
- Co-signing for a mortgage loan incurs a lot of risk. You’ll be responsible for payments if the primary borrower can’t keep up, so make sure you trust their ability to stay on top of things. Otherwise, you’ll be held liable, and failure to pay could seriously affect your credit.
- Co-signing requires a similar level of scrutiny from the bank or lender as if you were applying for a mortgage yourself. Be ready to have your credit score and income checked over carefully as part of the process.
- If you co-sign for someone, your taxes and estate might be impacted. Speak to a tax accountant who can advise you on the specifics and recommend the best course of action.
Be informed and prepared
- Agree to have access to the mortgage account of the primary applicant. You should be able to make sure the mortgage is in good standing, as late payments will hurt your credit score.
- Get copies of all the contracts and paperwork. Read everything carefully, and if necessary, get your lawyer to look over things. Know where you stand and what you’re co-signing up for.
- Get insurance. Speak with the primary applicant and discuss getting mortgage life insurance in the eventuality that they can’t make payments, such as injury or death.
Advantages & disadvantages of having a co-signer
There are a few clear pros and cons to having a co-signer for your mortgage.
The benefits of having a co-signer include improving your chances of approval if the lender requires reassurance they will be paid back in full, and on time. A co-signer may also help you secure a more desirable mortgage, since they are taking on some of the risk. However, you should never view your co-signer as someone who is going to take on the burden of your debt. Although legally this is where they stand, a co-signer should not be used in a situation where you do not feel certain you can manage your own repayments.
The main drawback of having a co-signer is they will be a part-owner of your property. For the co-signer, the drawbacks are significant, and you should only consider signing for a mortgage with someone if you know their financial habits and trust them to be responsible.
The potential drawbacks of co-signing include:
- Huge financial risk. If your co-signee stops making payments, you’re also responsible, and must cover their repayments.
- Potentially limited borrowing power. Since creditors assess your debt-to-income ratio, co-signing for a mortgage may dissuade some lenders from approving you for other loans.
- A worse relationship with the borrower. Bringing serious financial responsibilities and expectations into personal relationships needs to be managed very carefully, otherwise both parties could end up disappointed.
Mortgage co-signer requirements in Canada
Not just anyone can act as a co-signer. To be a co-signer in Canada, you will need to be fiscally sound and have a solid credit history. Lenders – as nesto, will primarily look at your income and credit as a way to gauge your level of financial stability to co-sign for a mortgage. Your finances will need to be in good order to give the lender the confidence you are capable of handling some of the risk. Ultimately, your credit score and regular income are the best indicators of this.
Co-signer vs guarantor: is there a difference?
Yes. A guarantor provides a written assurance to the lender that if the borrower defaults, the loan will still be repaid. While a co-signer is a part owner in the property, a guarantor is not. Guarantors are therefore less common than a co-signer, and more likely to be relied upon when the main applicant has a good enough income and credit score, but just needs extra help to get approved for a better mortgage.
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Should you get a co-signer for your mortgage loan?
You should only get a cosigner if you are financially stable and responsible. There are some situations where you may need a co-signer – e.g. if a parent signs for you because you have minimal credit history but tick all the right boxes otherwise – but generally, you should explore all your options first. The first step is to ensure you have your finances and credit in order first. You should not rely on a co-signer if you don’t think you can handle your repayments, as a mortgage requires consistent financial stability and proper budgeting.
However, if you are in a good position financially but you’ve been rejected for a mortgage, consider looking at different mortgage rates using our mortgage calculator, or exploring properties in a lower price range, before you look at co-signing.
Co-signing for a loan is a big financial commitment, and you should ensure you know exactly what you’re getting into, and that you trust the person you’re co-signing for. You need to make sure you’re covered in the worst case scenario, and that you can manage their payments if they can no longer pay. Co-signing for a mortgage is a huge commitment, and both parties should be totally clear on what their agreement is, what their legal requirements will be, and how it will affect both the co-signer and the primary applicant’s finances, taxes, credit, and relationship. Ultimately, co-signing can be a useful way to improve your chances of approval, but it should never be used in a situation where the loan applicant isn’t confident in their ability to make their payments on their own.
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