Mortgage co-signing can be a touchy topic. It involves two people jointly applying for a mortgage on a property (and in some cases, a second mortgage on a property). While this may seem simple enough on paper, the reality can often be more complicated. Once a co-signing application is approved, the two co-borrowers are in a legally binding agreement with each other and the bank. As a borrower, it can enable you to access financing that you may not be able to access on your own for reasons including a low income-to-debt ratio, low credit score, little to no credit history, and more. However, regardless of the reasons, one thing is clear when it comes to co-signing mortgages, you should know what you are getting into and what you may be on the hook for.
Why would someone co-sign?
As mentioned above, there may be several reasons why a co-signer may be required on a mortgage. The buyer may be new to the country and not have an established credit history, they may have a lower than desired credit score, or they may not make a sufficient enough income to qualify for the property and/or the rate they want. In a lot of cases, parents even co-sign mortgages for their children.
When a co-signer is used, the lender will evaluate the individual financial profiles, credit histories and employment records of both co-borrowers. As such, one must have adequate income and the capacity to take on additional debt in order to be a worthy co-signer. Here’s the catch though, if the borrower that you are signing for cannot make the scheduled principal and/or interest, the lenders have direct recourse to you as a co-signer to demand that you make the payments on their behalf. Any missed or late payments would also affect your credit as a co-signer. Another challenge you may face is that if in the future you decide to apply for a mortgage or other loans, this co-signed mortgage will count against you as a liability for all future mortgage or loan applications, unless you are able to remove yourself as a co-signer down the road. In order to be removed as a co-signer on a mortgage, the other borrower needs to either be able to qualify on their own in the future, add another co-signer, or sell the property.
How does a co-signer affect a mortgage?
At this point, it is worth exploring what a co-signer does (or can do) for a mortgage, and what they cannot. In terms of the value that a co-signer can add to a mortgage, they can primarily provide the lender with extra comfort that they borrowers will be able to make their mortgage loan payments on time and make the lender to approve the mortgage request. A lender may be hesitant to lend to a first-time borrower with a slightly weaker credit score or slightly higher than desired debt-to-income ratio. A co-signer with good credit and/or stronger debt-to-income ratio can alleviate some of these concerns for the lender by providing their assurance that they will step in if the borrower goes into default.
However, there are some limitations as to what a co-signer cannot do for you. In Canada, down payment requirements are reasonably stringent for properties at varying levels of pricing. A co-signer cannot help to reduce the minimum down payment requirement, but they can contribute to the total down payment if they wish. They can also help you qualify for a high ratio mortgage, which could help you qualify with as little as a 5% down payment.
Pros of Co-Signing a Mortgage
When co-signing a mortgage, there are several advantages for the primary borrower. They may be eligible for loans and mortgages that they were previously not qualified for on a standalone basis. In some cases, they may even obtain a slightly lower financing rate. As a co-signer, you have the satisfaction of helping your friend and/or family member buy their home and/or start establishing their credit profile. In addition, once a few years have passed and the primary borrower can qualify for a mortgage on their own, you can be taken off the loan as a co-signer, but that’s only if the primary borrower qualifies on their own, or can replace you with another co-signer, or alternatively sell the property.
Cons of Co-Signing a Mortgage
As a co-signer, there are several factors that you need to take into consideration. If you envision needing a loan in the near future yourself, co-signing a mortgage may place restrictions on your ability to do that as your debt-to-income ratio will be adversely affected after signing for a co-signed mortgage. In addition, any late payments made by the primary borrower on the property can also affect your credit score. And finally, needless to say, if the primary borrower on the property cannot make scheduled payments on time, you would have to shell out the money for those payments from your own pocket. If these payments cannot be made by you, lenders may potentially have the right to seize the collateralized property as payment. This typically will significantly harm your credit score. In addition to financial and credit related issues, all of these aforementioned scenarios can also put a significant strain or a relationship with your family member or friend. Hence, when it comes to co-signing mortgages, make sure that it is with someone you trust entirely.
Alternatives to Co-Signing a Mortgage
If you really do want to help your friend or family member out in acquiring the house, but do not want to have the above downsides, there is another alternative you can pursue.
Lend money to them directly. This saves you the trouble of putting yourself up as a co-signer on the loan and the maximum loss you take is the money you lent out instead of exposing yourself to further losses down the line.
Overall, being a co-signer comes with its risks. Ensure that you read the contracts carefully and that you trust the person fully when it comes to co-signing on their mortgage.