Qualifying for a mortgage is getting tougher, and if you have poor credit or are otherwise unable to meet a lender's requirements to get a mortgage, then getting someone to co-sign your mortgage could be the way to go.
If you can’t afford to buy a home or aren’t in a position to get the best mortgage rates and terms, then the conventional and conservative wisdom is to wait until you can afford to buy a home or take advantage of the best deals in the marketplace. In some housing markets, however, waiting it out could mean missing out, depending on how quickly property values are appreciating in the area.
If you don’t want to wait any longer to buy a home but don’t meet the guidelines set out by lenders and mortgage insurers, then you’re going to have to start shopping for alternatives to conventional mortgages, and co-signing could be just the ticket for you.
Why you might need a co-signer
You might remember moving out of your family home and looking for your first apartment. Maybe you just started your first full-time job and found the perfect place but without solid employment or credit history, a landlord wouldn’t rent a place to you unless you got someone to be a guarantor, a person who would essentially guarantee that they would pay the landlord if you were to stop paying your rent.
Co-signing a mortgage operates in much the same way; you’re not a strong enough applicant on your own and you need someone else who has a better track record to support your application. This can be because you have something negative on your credit report such as missed payments or a past bankruptcy, or because you just started a new job and are still on probation.
Rick Bossom, an accredited mortgage professional with Bayfield Mortgage Professionals in Courtenay, British Columbia, says that it’s an alternative to lenders just turning the deal down in cases where the borrowers are just on the edge of qualifying.
“It’s always going to be about the capacity and the quality of the borrower. The reason why a lender's going to ask for a co-signer is that the original borrower just isn’t strong enough,” he says. “They’re close but they just need a little bit more and that’s why the co-signing thing would come up. It’s not like they’re really, really bad, they’re just not quite there.”
And, as mortgage broker Jackie Woodward writes, “A suitable co-signer has to look good where the main borrower doesn’t.” In other words, if the primary applicant has weak credit, then the co-signer’s credit has to be strong. If the primary applicant’s soft spot is their debt or income, then the co-signer has to be strong in those areas.
Ways to co-sign a mortgage
Co-signing can play out in a couple of ways. The first is for someone to co-sign your mortgage and become a co-borrower, the same as a spouse or anyone else who you are actually buying the home with. It’s basically adding the support of another person’s credit history and income to those initially on the application. The co-signer will be put on the title of the home and lenders will consider them equally responsible for the debt should the mortgage go into default.
Another way that co-signing can happen is by way of a guarantor. If a co-signer decides to become a guarantor, then they’re backing the loan and essentially vouching for the person getting the loan that they’re going to be good for it. The guarantor is going to be responsible for the loan should the borrower go into default.
More than one person can co-sign a mortgage and anyone can do so, although it’s usually the parent(s) or a close relative of a borrower who steps up and is willing to put their neck on the line. Lenders also tend to look more favourably on family members as opposed to a (seemingly) random person who is co-signing. Ultimately, however, as long as the lender is satisfied that all parties meet the qualification requirements and can lessen the risk of their investment, they’re likely to approve it.
Before signing on the dotted line
One thing that Bossom says surprises both primary applicants and co-signers is the amount of information that’s requestedfrom co-signers. It's a complete vetting process because there are a number of things that can go wrong if things go south for the borrower, and as mentioned, being a co-signer makes someone responsible for the mortgage, the same as the primary applicant.
This could be a scary thing for an older parent who is close to retirement, or have their own plans on what to do with their money. Being a co-signer will impact their own ability to borrow money, which could be an issue if they decide that they want to renovate their home, get a car, or take out any other type of loan. And even if the primary applicant doesn’t go into default, if they ever get behind on their mortgage payment, then the credit of the co-signer could be affected. Even though being a co-signer isn’t meant to last for the life of the mortgage, and often not even the full length of the current mortgage term, co-signers should know that being on someone else’s mortgage will temporarily impact their borrowing capacity.
“They’re allowing their name and all their information to be used in the process of a mortgage, which is going to affect their ability to borrow anything in the future,” Bossom says. “They have to know that for the time they’re going to be a co-borrower, they could be adversely affected.”
If someone is a guarantor, then things can become even trickier because the person isn’t on title to the home. That means that even though they’re on the mortgage, they have no legal right to the home itself.
“If anything happens to the original borrower, where they die, or something happens, they’re not really on the title of that property but they’ve signed up for the loan. So they don’t have a lot of control,” Bossom says. “That’s a very scary thing.”
For this reason, he says, it’s much better for a co-signer to be a co-borrower on the property, where you can actually be on title to the property and enjoy all of the legal rights afforded to you.
In most cases, a co-signer is a bit older and more established, and the amount of required information could prove problematic if the co-signers themselves aren’t able to qualify for the mortgage for whatever reason. For example, the co-signers may own their home outright so have very little debt, but may be retired so have a limited income. Or there might be an issue if the borrower(s) need mortgage insurance through Canada Mortgage and Housing Corporation (CMHC), and the co-signer already has a mortgage that’s insured by CMHC, because CMHC limits the availability of their homeowner mortgage loan insurance to only one property per borrower/co-borrower at any given time (although there are other mortgage insurers
available if the lender is willing to use one of the alternatives).
Co-signing isn’t something to be taken lightly, and even if the relationship is that of a parent/child, it may be worth looking into a formal legal agreement between all co-borrowers to clarify that the primary applicants are the ones living in the home and responsible for making the mortgage payments.
Not a life sentence
Just because you need a co-signer to get a mortgage doesn’t mean that you will always need a co-signer. In fact, as soon as you feel that you’re strong enough to qualify without your co-signer – whether that period of time is two years or two weeks – you can ask your lender to reconsider the application and remove the co-signer from the title.
It is a legal process so there will be a relatively small cost associated with the process, but doing so will remove the co-signer from your loan, and release them from the responsibility of backing what is, for most people, a rather large amount of money. Removing a co-signer technically counts as changing the mortgage, so you’ll have to check with your mortgage broker and lender to ensure that it doesn’t count as breaking your mortgage and that there is no additional cost associated with doing so.
Co-signing isn’t the norm but it’s an option that could provide a lot of people with a little leg up onto the property ladder.
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