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A few decades ago, you probably would have been able to buy a decent home for under $100,000. Today, homes can go for five, even six or seven times that amount, especially in desirable suburban or city areas. Due to the state of Canada’s real estate market, it’s getting much harder to afford a home and still have money left for essential costs. Plus, the high price of most homes can make it incredibly hard to qualify for a mortgage. That’s why many homebuyers will ask a family member or close friend to cosign their mortgage.
What Does It Mean To Cosign A Mortgage?
Generally speaking, a prospective home buyer will get somebody to cosign their mortgage because their own income and credit won’t allow them to qualify by themselves. In fact, if you’re financially stable and have good credit, it’s possible that one of your friends or family members will ask you to cosign their mortgage someday.
By cosigning a mortgage, you’re agreeing to cover the buyer’s loan if they default or are unable to afford their payments. You wouldn’t see any of the typical benefits of the mortgage but you would be a co-borrower until the primary buyer pays off their loan or has your name removed from the contract when they’re financially stable enough.
This essentially gives the lender a guarantee that the loan payments will be made, whether or not the primary borrower is the one making them. As such, the buyer usually has an easier time qualifying for a decent loan, interest rate and payment plan.
What Are Your Rights As The Cosigner Of A Mortgage?
While it seems simple and safe enough on the surface, there are some important things to understand about your rights and responsibilities as a cosigner:
Who Owns The Property?
The primary borrower has most of the main rights and responsibilities when it comes to the property itself. As a cosigner, you’re only there to ensure the mortgage is paid on time when the borrower can’t afford it.
Who’s Responsible For The Mortgage?
The primary borrower is responsible for their mortgage. Their payments only become your problem if they default or ask you to cover them. Unfortunately, if the buyer has already missed payments, you may also have to pay the late fees or interest their account has accumulated, so make sure the person is trustworthy prior to co-signing.
Can Cosigning A Mortgage Impact Your Credit?
Yes! Co-signing a mortgage can damage your credit score if payments aren’t made, as both your credit reports are linked to the mortgage. Luckily, this also means your credit will slowly get better if you or the primary borrower makes timely payments.
Can You Stop Being A Cosigner?
You may be able to remove yourself as a mortgage cosigner by requesting a “cosigner release”. This will absolve you from any responsibilities if the primary borrower can’t make payments. However, the homeowner has to sign the release beforehand and the lender must approve it, which may not happen if the homeowner seems like they can’t handle the payments alone.
What Documents/Proof is Needed to Become a Cosigner?
To qualify as a cosigner, you have to prove that you could afford the mortgage if the main borrower can’t. Although exceptions may be possible with alternative lenders, most prime lenders will only allow you to cosign if you have a strong income and good creditworthiness. So, before approving you, they will likely inspect your:
- Credit report, credit score & payment history
- Identification & residency details
- Latest bank statements and/or paychecks (proof of income)
- Assets & liabilities (current debts, properties, etc.)
This inspection will occur when the primary borrower applies for their mortgage. Watch out, this will lead to a hard credit check/inquiry, which will lower your credit score and stay on your credit report for several years. Don’t forget to bring at least two forms of government photo ID, like your passport, driver’s license and/or Medicare card.
What’s the Difference Between a Cosigner, Guarantor & Co-Borrower?
When it comes to Canadian mortgages, there are a few positions you can apply for that would give you various responsibilities or forms of ownership over the home:
Common with parents, guardians and siblings, a cosigner is someone that agrees to finance the buyer’s mortgage payments if they can’t afford them or default on their loan. Since both borrowers are tied to the loan, their incomes, credit histories and debts will be inspected beforehand. As such, the cosigner may or may not have some claim over the property.
A mortgage guarantor also guarantees the primary borrower’s payments will be made, no matter the circumstances. However, they don’t sign the mortgage, own any of the property or share the home’s title. While both parties will have their finances and credit inspected, most guarantors are there to help stronger applicants qualify for better mortgages or interest rates.
Seen with spouses and common-law partners, a mortgage co-borrower buys into a percentage of the property. They go through the same application process and mortgage stress test (although the borrower with the higher income may take precedence and own the home’s title). The stronger their finances/credit are, the more borrowing power the team has.
|Your name is on the home’s title but you don’t necessarily own the property or homebuyer’s assets||Your name is not on the home’s title and you don’t own the property or homebuyer’s assets||Your name is most likely on the home’s title and you have some ownership over the property|
|You need to sign the mortgage application||You don’t need to sign the mortgage application||You need to sign the mortgage application|
|You’re responsible for making payments if the homeowner can’t||You guarantee the payments, even in the borrower defaults||You and the other borrower split responsibility for the payments|
|You are part-owner of the home||You don’t own the property||You are part-owner of the home|
|Used mainly by home buyers with less healthy finances or credit to increase borrowing power||Used mainly by applicants with stronger credentials, who are looking for a boost to their title||Used mainly by applicants who are buying a home and splitting the debt with another person|
Can You Be A Cosigner?
This depends on your finances and the lender’s specifications. For instance, if you have a low income and credit score, your chances of qualifying with a prime lender like a bank are far less likely, because the approval requirements are tighter. This is particularly true if you don’t have a solid job or your bad credit is due to missing payments in the past.
As mentioned, becoming an eligible cosigner is mostly about proving to the lender that you would be able to cover the primary borrower’s payments if they’re unable to. During the application process, your finances are just as essential for approval as theirs.
What Are The Attributes Of A Good Cosigner?
Some lenders are more lenient than others. While many alternative mortgage companies accept clients with less-than-perfect credit scores or incomes, banks and credit unions generally won’t. That said, a mortgage is a huge amount of money to lend out, so the approval process is normally long, complicated and difficult, no matter where you apply.
While some lenders will consider the fact that you have other assets to offer as collateral or a high net worth, most are only looking at one thing; your ability to afford the primary borrower’s mortgage payments. So, the best way to qualify as a cosigner and help the home buyer secure a decent mortgage is to have:
- A good credit history and high credit score (at least 660 – 900)
- A solid source of employment and high monthly income
- A low debt-to-income ratio (ideally no large debts at all)
Should You Say “Yes” To Being A Cosigner?
Whether you’re about to be a cosigner or you’re asking someone to cosign your mortgage, it’s important to assess the situation and think things over before signing any contracts. Similar to buying a home, cosigning a mortgage is a major financial responsibility, only without the benefits of being the property’s true owner.
Remember, as co-signer, you’re also a partial borrower and if the primary buyer can’t make payments or defaults, whatever debt and financial consequences that follow will become yours to deal with. That’s why many cosigned mortgages come from financially established parents who are helping their child purchase a home.
Tips For Cosigning a Mortgage
If you’re committed to being a mortgage cosigner, it’s best to do lots of research, prepare yourself financially and think about your decision carefully beforehand. Here are some things you should do to become a qualified cosigner to a mortgage:
- Get Your Finances & Credit Ready – Don’t forget, the two most important elements when trying to qualify as a mortgage cosigner are a solid income and good credit. For the highest chances of approval and lowest rates, be sure you have a steady job, little-to-no debt and a good amount of savings to fall back on.
- Watch Out For Missed Payments – Missing mortgage payments is one of the worst things that you or the main buyer can do. It will not only damage your credit but lead to penalty charges and high-interest debt. Moreover, any other properties you own could be at risk if the account goes into default and the lender sues you.
- Figure Out Your Legal Rights & Responsibilities – Cosigning a mortgage doesn’t just affect your creditworthiness and bank account, it could have an impact on your taxes and estate too. So, it may also be a good idea to hire a lawyer for advice and extra legal protection.
- Request Access To Buyer’s Mortgage Information – Even if you don’t own the property, you should know exactly how the mortgage is being handled. Since the actions of the primary buyer can affect you too, it’s better to have access to their mortgage account in case you need to deal with the payments they miss.
- Ask For Copies Of All Paperwork – To further protect yourself against the potential negative actions of the primary borrower, request physical and digital copies of any documentation involved. This way, you’ll have an easier time understanding the agreement.
- Consider The Capital Gains Tax – The capital gains tax is a perfect example of how your income taxes can be affected by cosigning a mortgage. Because the home is an asset that’s partially in your name, it could accumulate value (a.k.a. home equity) over time, which means you’ll eventually have to pay taxes on it.
- Minimize Tax Implications – To pay fewer taxes, take a 1% share in the property and form an agreement with the primary buyer that compensates you or gives you full ownership if there are tax consequences in the future. Alternatively, you can have your lawyer draw up a “bare trust agreement”, which states that you have no stake in the property and relinquishes you from any tax obligations.
- Buy Life Insurance – Since their debts will automatically become yours if your buyer can’t make their mortgage payments, you may also want to ask them about getting life insurance. For example, the payout from mortgage or term life insurance can cover the buyer’s debts if they die.
- Determine the Length of Your Commitment – A mortgage can take decades to pay off, so it’s also important to find out how long your co-signer agreement is and whether modifications are possible. You might be able to get released mid-term if the primary borrower manages to assume the whole mortgage.
What if the cosigner wants to get out of the mortgage deal?
Can being a cosigner hurt my credit?
How do I find a cosigner?
What do I do to prevent harm to my credit record as a cosigner?
Thinking About Cosigning A Mortgage?
Then no amount of preparation is too much. While you won’t see the full benefits of homeownership, you’ll still qualify as a co-borrower, so your finances and credit will be linked to the main buyer’s mortgage account. For more information about your cosigner rights and responsibilities, look for some professional legal and financial assistance.
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