July 12, 2019

All About Co-Signing

Co-signers can mean the difference between a mortgage approval or decline…but before you sign on the dotted line, know the pros and cons.

When a lender crunches the numbers, it’s possible their calculations indicate that too much of your income is needed to service core homeownership expenses like your mortgage payment, property taxes, and heating. In this situation, having a co-signer can help you qualify.

 

When to use a co-signer

A mortgage co-signer comes in handy for many reasons, most often when an applicant has “light” credit (minimal credit history) or insufficient income to qualify for the mortgage on their own.

In the lender’s eyes, a co-signer helps lessen the risk of loan repayment issues.

 

Who can co-sign?

We naturally think of co-signers as parents, but children can co-sign for their retired or unemployed parents, too. Siblings and spouses can also co-sign. While it is most often a close family member that agrees to co-sign, there is no familial requirement. And, more than one-person can co-sign, if required.

The lender’s focus is centered around the co-signer’s income and credit history. Some people think a good co-signer means somebody with a lot of equity in their home (high net worth). But, if their main source of income is CPP and OAS while living mortgage free, this is not going to help you qualify.

Your co-signer’s strengths should counteract your weaknesses as a borrower. If you have bruised credit, your co-signer should have a long Canadian credit history and a good score. If income is holding you back, find a co-signer with strong income (proven history of consistently strongearnings over time).

 

What does the process involve?

A co-signer must undergo the same strenuous income and credit verification processes that theprimary mortgage applicant does. The process is more involved than just a credit check.

In order to be a co-signer, the lender requires a full application (which can be completed in person or online), and it will require verification of income, debts, property ownership and the servicing costs associated with all properties the co-signer owns.

A job letter, paystub, current mortgage statement(s), property tax statement(s) and 3 months’ bank statements are a few examples of the documents the co-signer will likely need to gather. The employment situation, and the lender’s policies, will dictate the specific documents required…but a co-signer should be prepared to produce most of the same documents required for any prior mortgage approvals. Your Broker will advise you of the specifics as early as possible.

 

What are my responsibilities as a co-signer?

There are typically two different ways a co-signer can take shape:

1. The co-signer becomes a co-borrower. This is like having a partner or spouse buy the home with the primary applicant. This involves adding the support of another person’s credit history and income to the application. The co-signer is placed on the title of the home and the lender considers this person equally responsible for the debt if the mortgage goes into default.
2. The co-signer becomes a guarantor. In this scenario, he/she is backing the loan and vouching that the borrower will repay it on time. The guarantor is responsible for the loan if it goes into default. Not many lenders process applications with guarantors, as they prefer all parties to share in the ownership. But some people want to avoid co-ownership for tax or estate planning purposes (your Broker can advise).

 

If you’ve been asked to co-sign, here are ten things you should consider.

Regardless of who asks you to co-sign, it’s a decision you should weigh carefully. After all, you’re being asked because the individual(s) could not get a mortgage approval on their own. If you trust the borrower and have confidence in his or her ability to repay the loan, co-signing can be a generous way to help a family member or friend in need.

But, before you agree, consider the following:

 

1. Be sure you can afford to pay off the debt if the borrower defaults. If you had to assume the loan payments, would it cause you financial hardship? Consider the borrower’s character and stability.
2. Get copies of all loan paperwork and be sure you fully understand the terms and conditions of the loan before signing. The responsibility of the co-signer can vary by lender, so you need to understand exactly when and how you are responsible for repayment prior to committing.
3. If you co-sign, it will appear on your credit report. If you are planning to borrow money in the future, it can impact your debt servicing ratios.
4. 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.
5. 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. We often recommend this to our clients.
6. 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.
7. 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.
8. 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.
9. Before agreeing to co-sign, we strongly recommend you have a separate conversation with your Broker to discuss your own financial situation and future borrowing needs. Your Broker should be able to assess any risk factors or red flags from the on-set that could impact your decision to commit so you don’t go too far down a path that might not be right for you.
10. Also, some co-signers wait to receive independent legal advice from their lawyer untilclosing… this is too late. Don’t leave things to the wire because this can jeopardize your relationship with the borrower (first and foremost) and the lender that’s approved you as aco-signer. If you’re feeling unsure about the legal impacts of co-signing, consult your lawyer early for a quick conversation. Throughout the process, your Broker should be making him/herself available to answer any mortgage-specific questions your lawyer has.Once a mortgage commitment is received from the lender, this is a good time to engage your lawyer… just beware that you need a responsive lawyer because commitments often need to be signed within 5-7 days.


I’m on the other side of the equation: Should I ask somebody to co-sign for me?

If you find yourself on the other side of the equation and need a co-signer, you should also consider your options. This may signal that you should reconsider the loan, or loan amount. Are you considering “too much home”?

Ask yourself if the mortgage makes sense for you right now, or if it’s a better financial decision to defer the purchase until you can pay off other debts or increase your income. If credit score is holding you back, have you taken the right steps to correct the situation, but you just need a little more time to rebound your score? If so, deferring 6-12 months may eliminate your need for a co-signer.

If co-signing is indeed the right approach (perhaps you’re just starting out in your career and you need to establish more credit history), look for a co-signer who’s financially responsible and with whom you have an open and honest relationship. If you do run into trouble making your payments, your co-signer will have to pay on your behalf – that’s a big responsibility. If they don’t make the payments, you’ll be responsible for the loan…so you don’t want to get yourself in trouble.

Be sure you understand the terms and conditions of the loan, and when your co-signer would be notified of your inability to pay. Also make sure you understand who is responsible for missed payments.

 

If you find yourself considering co-signing, talk to us early. We’re here to help.

You Dream It. We Finance It.