Tighter mortgage rules and higher mortgage prices, especially in overheated markets like Toronto and Vancouver, have made it difficult for people to buy a home on their own. This can be true even if you have good credit and pay. For example, if your debt to income ratio is too high, lenders won’t qualify you for a mortgage. However, there is a potential solution – a co-signer.
Why a Co-Signer Could Make All the Difference
A co-signer for a mortgage can make all the difference in a number of cases. They could help borrowers with a soft credit history or black marks on their credit qualify for a home loan. Yet it is the population with good credit that otherwise borderline in qualifying than those signing up with co-signers in mass.
We tend to think of co-signers as the Bank of Mom and Dad. After all, parents tend to be those who gift money to be used as the down-payment for the property. However, anyone could be a co-signer. Adult children could co-sign for retired parents. Siblings and spouses can co-sign, as well. You could even have more than one person co-sign for the property. Co-signers can increase the odds of the loan getting approved because it reduces the risk associated with the mortgage loan.
Understanding the Co-Signer’s Requirements
The co-signer is not just loaning you their good credit history. The Red Deer mortgage lender will require a full application since the co-signer will be obligated to make the payments if you can’t. This means they’ll have to share information on their own debt payments, any properties they own and their own housing obligations.
What Makes Someone a Strong Co-Signer?
The mortgage lender’s biggest consideration is whether or not the co-signer can and will pay the payments if you cannot. This means they focus on the co-signers’ income and credit history. The co-signer doesn’t have to have a high net worth or ton of equity in their own home. For example, someone living on OAS and CPP though they own their home really can’t help you qualify for a mortgage of your own. A co-signer with good credit but low income won’t be able to pay your house payment, too. A co-signer with high income but spotty payment history may not be accepted, because they may not pay the payment on a home they don’t even live in. When searching for a co-signer, ensure that they qualify. The best co-signer, though, will make up for your own weaknesses. For example, the co-signer who could easily pay your house payment when you can’t or has spotless credit when yours is bad is the greatest asset you have.
There are two ways co-signers can enter the agreement. One is for the co-signer to become a co-borrower. This is similar to when two spouses buy the home together, each one obligated to pay the payments. In these cases, the co-signer is equally responsible for the debt if the mortgage goes into default.
The other option is when the co-signer is a guarantor. In this case, they are responsible for the loan if the loan goes into default. This option is best if you want to avoid co-ownership of the home for tax or estate planning reasons. However, not all Red Deer mortgage lenders will accept guarantors, because people are less likely to pay a loan when there is no asset backing it.
Things to Keep in Mind as a Co-Signee
Here are a few things you need to keep in mind as a co-signee.
- Are you looking for a co-signee? Be appreciative, because many people won’t take the risk and others who want to help can’t qualify. Value them.
- It is reasonable for co-signers to ask the borrower to limit their risk. For example, the co-signer could require the borrower to have disability insurance. Then the disability insurance pays the mortgage payments for at least a while before the co-signer is held liable. Life insurance would pay off the mortgage if the borrower died.
- Are you being asked to co-sign for someone’s home loan? Recognize that this is an act of trust and support. If they need your help, they’ll need it desperately.
- Co-signing a debt is not a moral obligation. In fact, if you don’t think you can honor the obligation, say no. It is better than them losing their home because you can’t make the payment when they fall short. Conversely, don’t ask someone to co-sign for a loan if there is any doubt they would pay the payment when required. Nor do you want someone to have co-ownership of your home if they are likely to be sued.
- Get copies of all paperwork, and understand what you’re getting into before you sign. For example, co-signing could affect your legal and tax situation. It will significantly affect an estate, whether you have partial ownership of the property or the debt is considered owed by your estate. Talk to your tax accountant if the deal could result in capital gains taxes. Co-signing will impact the Land Transfer Tax Rebates for homebuyers.
- Recognize the risks you’re undertaking as a co-signer. If they don’t pay their payments, it could hurt your credit as well as theirs. Discuss how the risk might be mitigated, such as the borrower agreeing to refinance and eliminate the co-signer when their financial situation improves.