Are you considering asking someone to co-sign your mortgage application? Co-signer mortgage requirements in Canada can impact your borrowing ability, credit score, and financial freedom, so it’s important to understand the implications of co-signing a mortgage. In a positive sense, having someone co-sign your mortgage can mean getting the house of your dreams even if your credit score wouldn’t allow it on your own, so there can be many benefits.
What Does Co-Signing a Mortgage in Canada Mean?
Co-signing a mortgage is a financial arrangement where an individual agrees to take on shared responsibility for a mortgage loan with another person or party, typically the primary borrower. As with any other type of financial loan, someone can co-sign a mortgage to mitigate the risks to the lender and provide primary borrowers with the ability to obtain a higher loan. The primary borrower is the person who intends to purchase a home and is primarily responsible for repaying the loan. The co-signer, on the other hand, is essentially providing additional assurance to the lender that the loan will be repaid.
Home buyers may need a co-signer for a number of reasons, but in the end, a co-signer is someone who agrees to take on part of the mortgage ‘risk’ and would be responsible for paying the lender if the primary borrower were to default – or stop paying – on the mortgage. If the co-signer fails to do so, their credit score may be negatively affected, and they could face legal action from the lender. Co-signing a mortgage can have a direct impact on the co-signer’s credit history and credit score. Any late payments or defaults on the mortgage will be reflected on both the primary borrower and co-signer’s credit reports, potentially making it more difficult for the co-signer to obtain credit in the future.
While there are some risks to the co-signer, co-signing can be beneficial for the primary borrower because it may increase their chances of being approved for a mortgage or allow them to qualify for a larger loan amount. This is often the case when the primary borrower has a limited credit history or a lower credit score.
Before co-signing a mortgage, it’s crucial for both the primary borrower and the co-signer to fully understand the responsibilities and risks involved. Both parties should carefully review the mortgage agreement, consult with legal and financial advisors, and have a clear plan in place for how they will manage the mortgage payments to avoid potential conflicts and financial hardship.
The Differences Between a Co-Signer vs Co-Borrower vs Mortgage Guarantor
While the terms co-signer, co-borrower, and mortgage guarantor all refer to individuals who play a role in obtaining a mortgage, they do have different definitions and rights to the property.
Co-Signer:
A co-signer is someone who signs the mortgage loan along with the primary borrower. The co-signer shares equal responsibility for repaying the loan and is legally obligated to make payments if the primary borrower defaults. Co-signers sign the mortgage application and are typically listed on the title as a part-owner. Co-signers are typically used to help a primary borrower qualify for a loan when they may not meet the lender’s credit or income requirements on their own. Typically, a co-signer is a close friend or family member who wants to help a primary borrower get a mortgage for their dream home.
Co-Borrower:
A co-borrower is also someone who shares the mortgage loan with the primary borrower, but unlike co-signers, co-borrowers have a legal interest and joint (equal) ownership of the property, sharing financial responsibility for the mortgage. Co-borrowers often include spouses or partners who intend to live in the property together and want to share the financial responsibility for the mortgage.
Mortgage Guarantor:
A mortgage guarantor is an individual or entity that provides a guarantee for the mortgage loan but does not have ownership or co-borrower status. The guarantor’s role is to offer additional assurance to the lender that the loan will be repaid if the primary borrower defaults. They are a secondary source of repayment. Unlike a co-signer, mortgage guarantors do not sign a mortgage application and are not listed on the title. Mortgage guarantor’s are needed when the primary borrower’s creditworthiness or income is in question, and the lender requires extra security but not as much as a co-signer.
The choice between these roles depends on the borrower’s relationship, creditworthiness, income, and the lender’s requirements. If you are deciding which of these roles is right for you, it’s wise to consult a financial advisor.
Do You Need a Mortgage Co-Signer?
Before asking someone to co-sign your mortgage, it’s important to determine if having a mortgage is a financially feasible option. If you determine that you can make mortgage payments, but you’re just struggling to be approved for the loan, then it may be a wise choice to ask for a mortgage co-signer. There are several situations in which you might consider having a mortgage co-signer.
1. Insufficient or Poor Credit History
Whether or not your financial situation is in a good place, if you have a limited credit history or a low credit score, lenders may be hesitant to approve your mortgage application. A co-signer with a strong credit history can help you qualify for a loan and secure more favorable terms.
2. Applying for Permanent Residency
If you are a newcomer to Canada and not yet a permanent resident, you may be required to have a larger down payment in order to get a mortgage. If your international credit score is considered too risky by lenders, having a co-signer may make getting a mortgage easier.
3. Self-Employment
Self-employed individuals often face stricter requirements for proving income stability. If you’re self-employed and have an irregular income, a co-signer with a stable job and income can provide added assurance to the lender.
4. Recently Graduated
Recent college graduates might have student loan debt and limited work history, making it challenging to qualify for a mortgage. A co-signer can help bridge the gap until your financial situation stabilizes.
5. High Debt-to-Income Ratio
If you have a significant amount of existing debt, such as credit card debt, auto loans, or another mortgage, it can negatively impact your debt-to-income ratio. A co-signer can offset your existing debt and make your application more appealing to lenders.
6. Desire for Better Terms
Even if you can qualify for a mortgage on your own, having a co-signer with excellent credit can help you secure a lower interest rate, resulting in lower monthly payments and long-term savings.
It’s important to note that while a co-signer can help you secure a mortgage, they are taking on a significant financial responsibility. If you default on the loan, it can have serious consequences for both you and the co-signer, including damage to your credit scores and potential legal actions by the lender. Therefore, it’s essential to have a clear and open discussion with any potential co-signer, understand the risks involved, and have a plan in place to ensure timely mortgage payments. Additionally, lenders have their own policies regarding co-signers, so it’s important to work with a lender who is willing to accept co-signers if this is the route you choose.
Who Can Be Your Mortgage Co-Signer
There are no legal requirements to being a co-signer on a mortgage, other than having a high enough credit score and financial ability to be approved by a lender. While usually someone will ask a close friend or family member to co-sign on a mortgage, technically speaking your dentist would be allowed to co-sign your mortgage in Canada if they chose to do so. When deciding on who to ask to co-sign your mortgage, it’s most important to choose someone you trust and who trusts you in return.
Benefits of Co-Signing a Mortgage
There are benefits to co-signing a mortgage both for the co-signer and primary borrower.
- Increased odds in getting approved for a mortgage
- Access to better loan terms
- Build and improve your credit score
- Get approved for a larger loan
- Peace of mind for lenders
- Help for special circumstances
One of the primary benefits of having a co-signer is an increased likelihood of loan approval. If you have a co-signer with a strong credit history, stable income, and good financial standing, lenders may be more willing to approve your loan application, even if you have limited credit or income. Also with a co-signer, you may qualify for more favorable loan terms, such as a lower interest rate and higher loan amounts. This can result in lower monthly payments and potentially save you money over the life of the loan while you’re looking to purchase a more expensive property or need additional funds for other purposes.
If you have a limited credit history or poor credit, successfully managing a loan with a co-signer can help you build or improve your credit score over time. Timely payments can have a positive impact on your credit history and allow you to qualify for better loans in the future – without needing a co-signer. Co-signers can also be particularly helpful in situations where borrowers face unique challenges getting approved for a loan, for example if you’re self-employed, are a recent graduate with limited work history, or you have a limited Canadian work history..
Finally, lenders may be more willing to trust your ability to repay the loan when a co-signer is involved, as they often view co-signers as a form of security. If the primary borrower encounters financial difficulties, the co-signer provides an additional source of repayment, reducing the lender’s risk.
Risks of Co-Signing a Mortgage
While co-signing a mortgage can make getting a mortgage easier for the primary borrower, there are also several risks that should be taken into consideration.
- Added financial responsibility for the co-signer
- Impacting your credit score
- Difficulty obtaining new loans
- Relationship risks
- Difficulty removing the co-signer
Co-signers are equally responsible for repaying the mortgage. If the primary borrower defaults on payments, the co-signer is legally obligated to cover them. This can be a substantial financial burden, and the co-signer may need to make payments for an extended period. Lenders are also within their rights to take legal action against a co-signer to collect the debt. As a co-signer, if the primary borrower makes a late payment it could negatively impact your credit score, causing difficulty in the future. Co-signing a mortgage can also make it difficult to obtain a mortgage or other loan for yourself in the future.
Co-signing a mortgage can strain relationships, even if it’s between family members or close friends. Financial disagreements or difficulties can lead to tension and conflict, so it’s important to know that you trust each other. Finally, it can be challenging to remove a co-signer from a mortgage and the title. Typically, this can only happen if the primary borrower refinances the mortgage in their name alone or sells the property. Until then, the co-signer remains legally responsible for the loan.
How Does a Co-Signer Impact Your Mortgage Insurance?
Mortgage insurance is an added fee on your monthly mortgage payment and is an additional safeguard for the lender against potential defaults on the mortgage. If you’re looking into buying a new home but don’t have a 20 percent down payment, you’ll be required to get mortgage insurance. Due to changes made by CMHC in 2014 regarding mortgage insurance, an individual can only hold mortgage insurance for one property. If you’ve asked a co-signer and they already have a mortgage with mortgage insurance, they won’t be able to co-sign your mortgage unless you have a down payment of 20 percent. If you aren’t able to have a 20 percent down payment, you’ll need to ask a different co-signer.
How to Legally Protect Co-signers and Primary Borrowers
If you’re considering going into a partnership for a mortgage with a co-signer and primary borrower, it’s important to protect yourself with a legal, enforceable contract. If you’re going to co-sign a mortgage or have someone co-sign your mortgage, go through a lawyer to ensure that you’re both protected. This will ensure that co-signers are financially protected as well as guarantee that the primary borrower’s assets (including the property itself) is protected.
Buying a Home in Maple Crest
If you’re interested in buying a new home in Maple Crest but are unsure about getting a mortgage, a co-signer may be a fantastic option for you! Co-signers can allow you to get a mortgage for your dream home in a timeframe that works for your family!
