What does it mean to co-sign a mortgage?

As Canadian homes become less affordable, particularly in markets like Vancouver and Toronto and GTA, homebuyers are finding it increasingly hard to afford their ideal home.  You may have a good job, a solid income, a sizeable down payment and excellent credit, but that may still not be enough to allow you to realize the purchase of your dream home.

If this is the case, adding a family member to your application, to help boost the overall income or credit strength can be the difference maker in allowing you to purchase that home. This practice is called co-signing, and is available on a variety of loans, including mortgages.  First off, you should check to see how much you can qualify for on your own, and then see if adding your co-singer will boost your budget.  Try our easy calculator here > Maximum Home Price Calculator

What does it mean to co-sign a mortgage?

When you co-sign a mortgage, you’re guaranteeing the payment of the mortgage if the primary borrower can’t make the payments. You become a co-borrower, and you take on responsibility for the mortgage. Co-signing a mortgage is a big risk for the co-signer, so it mostly happens between family members, such as, parents co-sign for their children, adult children co-sign for retired parents, or siblings co-sign for each other.

A mortgage co-signer can come in handy for many reasons, including when applicants have a soft or blemished credit history. However these days, it seems insufficient income supporting the mortgage application is the primary culprit. A co-signer is likely to be approved when the lender is satisfied he/she will help lessen the risk associated with loan repayment.

Should you co-sign a loan?

Think carefully before committing to co-sign on a loan. Co-signing on a loan makes you a co-borrower, which means you’re buying the home alongside the primary borrower. Being a co-borrower means you’ll be responsible for the loan if the primary borrower defaults. This is a huge responsibility, and is the reason why most co-signing is limited to parent-child relationships.

Other people in your life may approach you about co-signing on a loan, and you should think very carefully before agreeing. Remember, you’re never under any obligation to co-sign on a loan. If you have any concerns about whether the primary borrower can make their mortgage payments on time, you should address them upfront.

When you bring a co-signer into the picture, you are also taking their entire personal finances into consideration. It’s not just a simple matter of checking their credit.

Your mortgage lender is going to need a full application from them in order to grasp their financial picture, including information on all properties they own, any debts they are servicing and all of their own housing obligations. Your co-signer will go through the wringer much like you have.

What makes a strong co-signer?

The lender’s focus is mainly centred around a co-signer’s income coupled with a decent credit history. Some people think that if they have tons of equity in their home (high net worth) they will be great co-signers. But if they are primarily relying on CPP and OAS while living mortgage free, this is not going to help you qualify for a mortgage.

The best co-signer will offer strengths you currently lack when filling out a mortgage application on your own. For instance, if your income is preventing you from qualifying, find a co-signer with strong income. Or, if your issue is insufficient credit, bring a co-signer on board who has healthy credit.

What’s the difference between a co-signer vs guarantor?

When you co-sign on a mortgage you become a co-borrower, similar to how you might buy a home with a spouse or partner. Both credit histories are considered, and the income of both applicants is used to secure the loan. The co-signer is part owner of the home, and the lender will hold the co-signer responsible if the primary borrower can’t make their monthly mortgage payments.

A guarantor, on the other hand, vouches for the primary lender and guarantees the loan in the event the primary borrower defaults, but does not share in the title of the home. Guarantors are less common than co-signers, and this practice is typically reserved for co-signers with great liability risks such as lawyers or doctors with their own practices.

Should you get a co-signer for your mortgage?

If you’re looking to purchase a home and have any of the circumstances above that make it difficult to obtain a mortgage, consider all aspects of your finances before using a co-signer. Consider why you were denied for a mortgage in the first place: Is it because you have too much debt, or a history of defaulting on loans? If this is the case, take steps to fix these problems before leaping into homeownership.

If you’re being denied a mortgage on other grounds, such as not having had time to establish a credit history yet, a co-signer could be a good way to move forward with your home purchase.

If the issue is insufficient income, make sure you understand what the mortgage payment requirements will be, and figure out how you will manage these payments on your income alone.  Adding a co-signer is a great step to increase your budget, but it’s important to understand that the limitations on debt-to-income is there for a reason, so if you will be exceeding this having a good plan in place for how you will manage these higher payments will be crucial.

The bottom line

Co-signing on a loan is a significant financial risk, so you should consider the implications carefully before moving forward. Make sure you have complete confidence in the primary borrower, and that you can manage if they can’t make their monthly mortgage payments. If you’re looking to recruit a co-signer on your mortgage, consider how much you’re actually asking of them, and whether there’s a better way to afford the home you want, such as getting a gifted down payment instead. As long as both parties take their time in making a decision, co-signing can often be the helping hand a family needs to afford the home of their dreams.

Nine things to keep in mind as a co-signee

1. It is a rare privilege to find someone who is willing to co-sign for you. Make sure you are deserving of their trust and support.
2. It is NOT your responsibility to co-sign for anyone. Carefully think about the character and stability of the people asking for your help, and if there is any chance you may need your own financial flexibility down the road, think twice before possibly shooting yourself in the foot.
3. Ask for copies of all paperwork and be sure you fully understand the terms before signing.
4. If you co-sign or act as a guarantor, you are entrusting your personal credit history to the primary borrowers. Late payments hurt both of you, so I recommend you have full access to all mortgage and tax account information to spot signs of trouble the instant they occur.
5. Understand your legal, tax and even your estate’s position when considering becoming a co-signer. You are taking on a potentially large obligation that could cripple you financially if the borrower(s) cannot pay.
6. A prudent co-signer may insist the primary applicants have disability insurance protecting the mortgage payments in the event of an income disruption due to poor health. Some will also insist on life insurance.
7. Try to understand upfront how many years the co-borrower agreement will be in place, and whether you can change things mid-term if the borrower becomes able to assume the original mortgage on their own.
8. There can be implications with respect to your personal income taxes. You may accumulate an obligation to pay capital gains taxes down the road. This should be discussed this with your tax accountant.
9. Co-signing impacts Land Transfer Tax Rebates for first-time homebuyers. The rebate amount is reduced based on the percentage of ownership attributed to the co-signer. Try out land transfer tax calculator app > http://cma.me/marshalltully