Whether you are the borrower who needs a co-signer or someone has asked you to co-sign for them in securing a mortgage approval, you should read this article to fully understand all of the implications. The mortgage landscape has changed a lot over the last couple of years and as a number of new mortgage rules have come into effect it’s not as easy to qualify for a mortgage as it was 5-years ago. As a result of these changes I have seen an increase in co-signers required so this week I want to cover the 5 “must knows” about co-signing for a mortgage.
What is a co-signer?
If a borrower has weak credit or their income does not support the mortgage amount they have applied for, a co-signer may be requested. A co-signer is an additional borrower put onto the mortgage application in order to add strength to the approval of the mortgage financing. The idea being, the stronger the application, the more appealing it is for a potential lender to approve the financing. You can have more than one co-signer on an application and an example of this is two parents co-signing for their child who is buying their first home. Keep in mind the purpose of a co-signer is to improve the odds of a mortgage approval, so a weak borrower would not make a good co-signer in this situation. In addition to a co-signer going on the mortgage (the debt) they will also go on the accompanying property land title (the asset).
What is a strong co-signer?
The financial profile of a suitable co-signer will be dependent on why a co-signer is required. If the main borrowers credit is weak, the lender will be looking for a co-signer who has a strong credit history though if the primary borrowers qualifying income is hard to prove, the co-signer will have to have a strong reliable income source with minimal debt. A suitable co-signer has to look good where the main borrower doesn’t.
Difference between a co-signor and guarantor
A few notable mortgage terms to differentiate between are a co-borrower, co-signer, and guarantor. A co-borrower is just another applicant, such as the spouse or siblings buying a house together. All borrowers are qualifying together and all will likely owner occupy the subject property. Whereas a co-signer is usually brought on to add strength to a mortgage application where the main borrower lacks and it’s not unusual for the co-signer to owner occupy a different property.
A guarantor is not as common as a co-signer as future liabilities and implications for a guarantor can be quite different than that of a co-signer depending on the specific transaction. A guarantor would personally guarantee the mortgage repayment in the event the primary borrower does not pay, however, a notable difference with a guarantor is that a guarantor will only go on the mortgage (the debt) and not on the title of the property (asset).
How the co-signer is affected
As a co-signer on a mortgage, you are now 100% responsible for that debt even if the primary borrower makes all of the payments from their own bank account. In the case of a mortgage loan, this not only applies to the principle and interest payments, but also to the property taxes too and condo fees if applicable. Basically, if the primary borrower doesn’t pay, the lender will be calling you to make the payments. Further to that, the lender often doesn’t notify you, the co-signer, of any delinquent payments until the loan is already significantly behind and has already negatively affected your credit rating which could affect your future borrowing potential. The co-signer also needs to be aware ALL of the costs associated with this new home as mentioned above will now have to be disclosed on any future credit applications you enter into which could impact on how much you can now borrow.
Removing a co-signer
The primary borrower cannot make any changes to the mortgage without the consent of the co-signer which means when you are ready to remove your co-signer, you need to contact the lender to determine what their procedures are. If your intention was to only have the co-signer on the mortgage and the land title for a short period of time, you may want to initially choose to go with the lender who has policies and procedures that are going to work for all. Ideally, if you got a great rate for a 5 year closed fixed term, and believe you will qualify on your own without the co-signer after the first year, you would want to work with a lender who will change the ownership of the home without having to break the mortgage term.
May 30, 2014 brought a major change to the co-signing rules of a CMHC insured mortgage that states an individual can no longer be a co-signer on a new CMHC mortgage if they already have a CMHC insured mortgage. This is a pretty significant change though the good news is there are still two other insurer options available in Canada, Genworth and Canada Guaranty in addition to a number of uninsured options. If you’ve been declined for a mortgage and require a co-signer, talk with your favorite mortgage professional about what the lender will be looking for in order to grant financing approval. If a co-signer is not an option for you, discuss a plan of action for you to get your financial profile to a level that lenders will like sometime in the future.