Co-signing Mortgages

Things to Know When Co-Signing a Mortgage

A co-signer for a mortgage can be useful for a variety of reasons, including when applicants have a weak or flawed credit history or not enough income to qualify. 

Co-signing a mortgage in Canada is simple so long as the lender is convinced that a co-signer will help reduce the risk of mortgage payback. If you are looking to get a co-signor for your mortgage, there are certain things you should be aware of. 


What is Co-Signing a Mortgage in Canada? 

If you co-sign a mortgage, you agree to pay the monthly mortgage payments if the principal borrower is unable to do so. You essentially become a co-borrower, and you’re responsible for a portion of the mortgage. 

Because co-signing a mortgage entails a significant risk for the co-signer, it is typically done amongst family members. Parents, for example, may co-sign for their children, adult children may co-sign for retired parents, and siblings may co-sign for one another.


Why Would You Need a Mortgage Co-signer? 

Co-signing a mortgage is now common practice for borrowers with bad credit or not enough income to qualify. A college graduate with weak credit or minimal work history is the two most prevalent examples of borrowers who look to co-sign. 

Some lenders can also obligate a co-signer if a borrower’s credit is too unstable. Borrowers who have previously had difficulty making mortgage payments usually fall under this category. 

Rising housing prices, stagnant wage growth, and stringent mortgage qualification rules can leave potential purchasers with insufficient funds to make a purchase. A co-signer adds financial weight to an application, allowing the principal borrower to qualify for a mortgage that they would not have been able on their own. This may help borrowers get a lower interest rate and better mortgage terms. 


Is it Wise to Co-sign a Mortgage? 

Consider your options carefully before agreeing to co-sign on a mortgage. Co-signing on a mortgage usually qualifies you as a co-borrower, which means you’ll be purchasing the home alongside the primary borrower. 

If the principal borrower defaults, you, as a co-borrower, will be accountable for the debt. This is a tremendous responsibility, which is why most co-signing occurs only between parents and close family members. 

You could be approached by someone in your life about co-signing a debt, and you should consider twice before agreeing. Remember that you are never obligated to co-sign a mortgage. If you have any worries about the primary borrower’s ability to make timely mortgage payments, you should address them at once.


When Can You Co-Sign a Mortgage? 

Take into account whether you can co-sign a mortgage in addition to whether you should. As a co-signer, your finances will be scrutinized in the same way as the principal borrower’s. 

That means the mortgage broker will look at your income, debt, and credit score to see if you will be able to repay the mortgage. You won’t be accepted for a co-signing mortgage if you have a lot of debt, bad credit, or no income.

Individuals with unstable careers, fluctuating income, several streams of debt, large personal expenses, and personal mortgages are unlikely to be approved as a mortgage co-signer. 


Options For Co-Signing a Mortgage 

If an individual wants to co-sign a mortgage there are two ways they can go about it. They are as follows: 

The Co-Signer Joins the Mortgage As a Co-Borrower

This is similar to having a partner or spouse purchase a home with the principal applicant. This entails using another person’s credit history and salary to back up your application. If the mortgage falls into default, the co-signer’s name is added to the title of the home, and the lender considers this individual to be equally accountable for the debt.

The Co-Signer Takes on the Role of Guarantor

In this case, he or she is endorsing the mortgage and ensuring that you will repay it on time. If the mortgage defaults, the guarantor is responsible for the debt. Many lenders refuse to approve applications with guarantors because they prefer that all parties share ownership. Some people, however, prefer to forgo co-ownership for tax or wealth management reasons.


Co-Signer vs Guarantor 

Co-signers are typically used when the principal applicant has major credit concerns and would not be approved for a mortgage without a co-signer.

When you co-sign on a mortgage, you become a co-borrower, just like when you buy a property with your spouse or partner. Both applicants’ credit histories are taken into account, and their income is used to secure the mortgage. The co-signer is a co-owner of the home, and if the principal borrower defaults on their monthly mortgage payments, the lender will hold the co-signer accountable.

A guarantor, on the other hand, stands behind the principal lender and guarantees the mortgage if the primary borrower defaults, but does not own the property. Co-signers are more common than guarantors.

Mortgage guarantors are commonly utilized when the primary applicant has a good income and credit history but needs a little extra help getting accepted for a higher mortgage amount.


What Makes a Good Co-Signer? 

When it comes to approving a co-signer, lenders usually look at the individual’s income and credit history. Some people believe they can qualify as a co-signer with a large amount of equity in their property.  However, this can often backfire if your property was not previously mortgaged or has a low amount of equity. 

An ideal co-signer makes up for any weaknesses or flaws that would make the primary applicant.  For example, if your income is hindering you from qualifying, find a co-signer with a high salary. Alternatively, if your problem is a lack of credit, enlist the help of a co-signer with good credit.


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