As part of our commitment to providing you with the best information on mortgages in Canada, we have developed this guide to understanding the role of a co-signer in the mortgage process. What is a co-signer and what role does this person play in applying for a mortgage? Read on to find out, and visit the other sections of our site to begin your mortgage application with or without a co-signer.
Lenders in Canada have fairly stringent loan standards, demanding the best credit histories from their loan applicants as well as debt-to-income ratios and loan-to-value ratios that indicate the applicant will be able to afford his or her mortgage payments over the long term. Sometimes, however, lenders receive applications from those whose credit history or other financial information is just below the loan-approval standards. Such applicants represent a greater risk to lenders than those who have fully met the lending standards. Still, at the same time, applicants who are slightly shy of reaching a lender’s normal credit and income requirements are a much lower risk for lenders than applicants with an awful credit history.
In such cases, a lending institution may extend a loan to the person who is just shy of meeting the loan standards if the borrower can get a co-signer. A co-signer on a mortgage is an individual who comes alongside the primary applicant and takes responsibility for the loan in the event that the primary borrower is unable to pay the mortgage. Banks are more willing to take a risk on a loan applicant if there is a co-signer because they know they have a second source of funds to fall back on if the actual applicant fails to pay the mortgage.
The co-signer gets his or her name on the property title, which makes that person a property co-owner. Lenders generally require a co-signer if they believe the primary applicant’s income is insufficient to cover mortgage payments. If income levels are fine but the credit history is slightly problematic or even nonexistent because the applicant has never used credit before, the lender may ask for a guarantor. A loan guarantor fulfills the same role as the co-signer in Canada except that the guarantor is not on the property title and does not have any legal right to the residence being purchased.
In many cases, the mortgage co-signer is the spouse of the primary applicant, but virtually anyone with a sufficient income may qualify to co-sign for a mortgage loan. It is not unusual, for example, for a parent or grandparent to co-sign a mortgage loan, especially when the individual applying for the loan is quite young or lacks a credit history for the bank to evaluate. All that is really required is for the co-signer to have a solid credit history and good credit score.
A lender may be willing to extend you a loan if you have a co-signer, but that does not necessarily mean you should take the bank up on its offer. To make an informed decision, you must consider some of the pros and cons of a mortgage co-signer:
• A mortgage co-signer enables you to get a loan for which you might not otherwise qualify.
• A mortgage co-signer can often help you get your financial house in order, make a better budget and so on when the co-signer is a close friend or family member and makes your financial education a condition of co-signing your loan.
• A mortgage co-signer can offer help in keeping up your property. Because the co-signer puts his or her name on the title, there is greater incentive for that person to take care of the investment, and this can translate into help with regular maintenance, cleaning and much more.
• If you do not get the right loan co-signer, he or she may hold the fact that he or she co-signed for your loan over your head for years to come.
• Because the co-signer’s name is on the title, he or she might feel no qualms about showing up at your home at any time whether you want the person to or not.
• Getting the name of a co-signer off of your property’s title can be time-consuming and expensive if the day ever comes that you want or need the co-signer removed from your title.
• If you are unable to make payments as the primary loan holder, the lender will demand that the co-signer take over after exhausting all payment possibilities with you. This will drastically limit the co-signer’s disposable income, which may impact the reputation you have with the co-signer. Furthermore, if the co-signer cannot make payments, he or she will be held just as liable for the failure to pay the mortgage as you, and his or her credit will be harmed.
• When a co-signer is placed on your loan, he or she will lose first-time home buyer status until about five years after the co-signer’s name is removed from the mortgage title. This will prevent them from taking advantage of the first-time home buyer tax credit and other purchase incentives available in Canada, which means asking someone to be a co-signer may actually hurt them.
If the lender tells you that you need a co-signer, you may feel as if finding one will be an impossible task. However, it will probably not be as difficult to get a good co-signer as you think. If your spouse qualifies financially to be a co-signer, you will probably have no problems at all — in fact, you are likely to be co-applicants anyway. Should you need someone else to be your co-signer, the best route to take is to talk to a family member with whom you have a good relationship. Nevertheless, a good relationship with the person is not sufficient to qualify that person as a co-signer. The potential co-signer must also have a good income.
We will finish this guide to mortgages and co-signers in Canada with a brief guide to applying for and maintaining your mortgage. Your mortgage co-signer will have to provide the lender with the same documentation of income and credit history that you do as the primary loan applicant. This includes the previous few years’ worth of T1 tax returns, the co-signer’s most recent pay stub, a letter of employment and so on. These documents are all used to verify the co-signer’s income and prove his or her creditworthiness. A credit check will also be performed, and the co-signer will have to be present at closing to sign the loan documents.
After the loan has closed, a co-signer can be taken off the mortgage and freed from all responsibility for the loan when the loan is refinanced. At that point, the lender that does the refinancing must check the primary borrower’s credit to verify that said person is able to afford the mortgage on his or her own. If it is determined that the primary borrower can handle the mortgage payments without a co-signer, then the co-signer’s name can be removed from the loan. If, on the other hand, the primary borrower is still too great of a risk for the lender, the co-signer cannot be taken off the loan.
At the end of the day, the most important thing to remember is that you, as the main applicant, are primarily responsible for the mortgage. The lender will send you the mortgage bill and expect you to pay your monthly loan payment. Your co-signer will be asked to take over payments only as an absolute last resort, and if this happens, your credit will be destroyed for some time to come. A co-signer is not someone for you to fall back on just in case your decision to buy a home was unwise; rather, he or she is someone who signs off on your creditworthiness because he or she is confident that you can afford the loan even if your past credit history and financial situation give the lender a slight pause. So, make sure you can actually afford your mortgage payment before you seek a co-signer. That way, you will not have to worry about negatively impacting that person’s finances.