Important Things To Know When Co-signing a Mortgage For Another Person
Understanding the Roles
In the world of mortgages, in addition to the main applicant on the mortgage application there are several roles individuals can take on: co-signer, co-borrower, and guarantor. Each role carries its own set of responsibilities and implications.
A co-signer is a co-applicant for a person who doesn’t qualify for a mortgage on their own. They must sign all mortgage documents and their name may or may not appear on the title of the property. Some lenders may require that the co-signer’s name be added to the property title, making them a co-owner. If the primary applicant defaults on their mortgage, the co-signer will assume full responsibility of the mortgage. This means that the co-signer is legally obligated to make the mortgage payments if the primary borrower doesn’t. When a co-signer is added to the application, the co-signer’s income and debts are used for qualification purposes along with the main applicant’s.
A co-borrower is similar to a co-signer, but it could also mean a guarantor. The use of the term varies between lenders, but the responsibility towards the debt guaranteed is the same: to step in and guarantee, and make the payment, when the main borrower will not or cannot do so. Similarly, they may or may not be on title of the property. A co-borrower with better credit or financial stability can help the primary borrower to qualify for the mortgage. Similar to the co-signer, the income and the debts of the co-borrower are used for qualification purposes together with the main applicant.
A guarantor has very similar responsibilities to a co-signer, but they do not have legal claim to the property. The primary role of a guarantor is to guarantee that regular mortgage payments get made, meaning to pay the debt of the borrower upon demand by the lender. Unlike a co-signer, a guarantor is usually not included on the title of the home, but some lenders may request that guarantors be added to the title, unless they are a spouse. Some lenders will only allow spousal guarantors. If the applicant is married, but the spouse is not on the application, a lender may ask for a clarification of why the spouse is not included with the application. Additional restrictions are applied by certain lenders that they only use the guarantors income if it is an immediate family, or they reside in the property being mortgaged. Immediate family includes a spouse, father, mother, child, brother, sister, grandparent, legal guardian, or legal dependent.
Please note that these terms are often used interchangeably, but there are key differences between them. It’s important to understand these differences when considering a mortgage application. Adding additional people to the mortgage application is usually limited to four applicants, including the main borrower. Any spouses not on title of the matrimonial property being mortgaged will still be required to sign a Spousal Consent agreeing to the mortgage.
Key Questions to Ask Before Co-Signing
Before agreeing to co-sign a mortgage, it’s important to consider the following questions:
- What is co-signing, exactly?
- What are my responsibilities when co-signing a mortgage?
- What are the risks of co-signing?
- How do I mitigate my risks?
- Do I trust the borrower?
- How can I be released from cosigning?
Each of these questions is important for understanding the commitment you’re about to make. Let’s look into each one in more detail.
What is Co-Signing, Exactly?
Co-signing involves agreeing to pay the borrower’s mortgage if they default or are unable to afford their payments. As a co-signer, you are essentially guaranteeing that the mortgage payments will be made.
What are My Responsibilities When Co-Signing a Mortgage?
As a co-signer, you are agreeing to cover the borrower’s mortgage if they default or are unable to afford their payments. This means that you are legally obligated to make the mortgage payments if the primary borrower doesn’t. This is a significant responsibility and should not be taken lightly.
What are the Risks of Co-Signing?
Co-signing a mortgage can affect your credit score and borrowing power. If the primary borrower misses a payment or goes into a default, it could significantly damage your credit. Furthermore, the co-signed mortgage becomes part of your total debt, which can affect your ability to secure future borrowing.
How Do I Mitigate My Risks?
Consider establishing a legal agreement with the primary borrower. This agreement can outline the responsibilities of each party and provide a plan of action if the primary borrower is unable to make payments. Additionally, ensure that you trust the borrower and are confident in their ability to make payments. This can help reduce the risks associated with co-signing a mortgage, but not completely eliminate them.
Do I Trust the Borrower?
Trust is vital when co-signing a mortgage. You need to be confident that the borrower will make their payments on time. If your trust in the borrower is low, it might be best to reconsider co-signing. This is a significant consideration and should not be overlooked.
How can I be released from cosigning?
Some lenders may allow co-borrowers and guarantors to be released after a minimum of 12 months, or longer, of on-time payments, but the primary borrower must qualify on their own. Lenders may or may not approve the release.
Important Considerations
When co-signing a mortgage in Canada, it’s important to consider factors such as existing credit history and credit score, employment and income, total debt service ratio (TDS), duration of the mortgage, your future borrowing needs and ability, and potential harm to your credit.
The Positives and Negatives of Co-Signing
Co-signing a mortgage can have several benefits, such as helping a loved one buy a home, securing better rates and terms for the borrower, and building credit. However, it also comes with potential downsides, such as equal responsibility for the debt, impact on your credit score, future borrowing restrictions, lack of ownership, and sometimes difficulty in being released as a co-signer. Also, the relationship between the co-signer and the primary borrower may become strained if payment issues arise.
Conclusion
Co-signing a mortgage is a significant financial commitment. The rules of who is allowed to be on the application when comes to co-signer, co-borrower or guarantor are not uniform across all lenders. Each lender sets their own rules, and what works with one lender may not work with another. Additionally, not all mortgage types/products will allow the inclusion of additional people on the application. Please obtain Independent Legal Advice before proceeding with this type of arrangement. While this article provides a general overview of the roles of co-signers and guarantors, everyone’s situation is unique. Therefore, it’s always a good idea to speak with a mortgage broker who can provide advice tailored to your specific circumstances, and help you navigate the complexities of mortgage co-signing.
At TheBroker.ca Ltd, we understand what needs to be done to secure a mortgage, with or without a cosigner. We can help identify lenders that best match your credit profile. Talk to us. We can offer you helpful advice on getting a mortgage, understanding current mortgage rates, and guide you through the process that will help you make informed decisions that align with your financial goals.
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This article was brought to you by TheBroker.ca Ltd., a mortgage brokerage that is licensed with the Financial Services Regulatory Agency of Ontario (FSRA), which regulates businesses in the financial sector. The Principal Broker Sash Trajkovski has over 20 years of real estate and mortgage experience in the Ontario marketplace. You can verify our licenses by visiting the following links from FSRA’s website: our corporate license and Principal Broker license. Our mortgages services are available to all residents of Ontario. If you’re in Ontario and looking for more personalized advice and information, consider booking your Complimentary Consultation today, and let us help you understand the details that will guide you on your path to a suitable mortgage solution.
Disclaimer: Please note that this information is current as of the date of publication and is intended to be general in nature. It is not intended to provide legal, tax, financial, or other professional advice and should not be relied upon as such. Always consult with a professional for advice tailored to your individual circumstances.
