Cosigning Mortgages And What It Means

By Jonathan Russell Canadian Mortgage Professional Magazine

Somebody other than the prospective homeowner (typically a family member or friend) will usually co-sign on a mortgage if the prospective homeowner’s credit and income are not enough for them to qualify themselves. And it works both ways. It is possible that a family member or friend will one day ask that you co-sign on a mortgage if you have good credit and are financially stable.

To co-sign on a mortgage means that you agree to cover the prospective homeowner’s loan should they, for whatever reason, be incapable of affording their own payments or if they default. If you do agree to co-sign, you will become a co-borrower until your name is taken off the contract when the homeowner is financially stable or until the homeowner pays off their loan. You would not, however, receive any of the standard benefits of the mortgage.

Whether the primary borrower is the person making the payments, the co-signer agreement means the lender will be guaranteed that the loan payments will be made, one way or another. Because of that guarantee, the homeowner will have a better time qualifying for a good loan, payment plan, and interest rate.

When does a mortgage applicant need a co-signer?

A mortgage applicant would need a co-signer if he or she has bad credit. Most commonly, a fresh graduate with a short employment history would have bad credit, in which case a co-signer would usually be needed for a first-time home purchase. Another common example, historically, was a borrower who had damaged their credit history after running into trouble on loans or making payments.

Today, the real estate market offers some of the best-ever mortgage rates, though there are plenty of reasons to ask someone to co-sign on your mortgage. Low wages coupled with higher home prices and strict lending criteria all play a role.

Co-signer vs. guarantor: what’s the difference?

The difference between a co-signer versus a guarantor basically comes down to claim over the property or share of the home’s title, among other factors. A co-signer is a person who will agree to make the homebuyer’s mortgage payments if he or she can not afford them, or if they default on their loan. Typically, a mortgage co-signer is a parent, guardian, or sibling. Because the mortgage co-signer and the homebuyer are both connected to the loan, their credit history, debts, and income will be inspected. This means that the co-signer could have some claim over the property.

While a mortgage guarantor also provides a guarantee that the homebuyer will make the mortgage payments, regardless of the circumstance, a guarantor does not sign the mortgage, share the home’s title, or own a portion of the property. Usually, a guarantor will help a strong applicant qualify for an even better interest rate or mortgage but will still have their credit and finances scrutinized.

Risks of co-signing a mortgage

There is a major risk when co-signing a mortgage. You should only consider acting as a co-signer if you are 100% confident with sharing the debt that may come your way. Since parents and other family members are more likely to have strong credit and bigger incomes in later life, the majority of Canadians turn to family to act as co-signers. Rather than simply tapping a person who is stable financially, however, it is important to ensure they are reliable if they have to take over the mortgage payments. Your co-signer might not be your co-signer indefinitely, but it will likely be uncomplicated and safer for all involved if you can one day resume your mortgage payments, letting them off the hook.

Steps to co-signing a mortgage in Canada

If you default as primary borrower, it could cause you serious damage financially. This is where a co-signer would step in—making it a major responsibility for them. It is critical, therefore, that everyone exercise due diligence throughout the process. If you want to co-sign a mortgage in Canada, here are some steps you will need to take.

Copy the paperwork. Prior to signing—read everything, first and foremost. Then retain copies of any and all paperwork for your own records.

Get mortgage account info. Make sure that the mortgage payments are being made promptly each month. This step is especially important because late payments impact your credit score.

Get insurance. To cover debts in the event of disability or death, encourage the primary borrower to get suitable term life insurance or mortgage life insurance.

Understand the legality. Since your estate and taxes could be affected if you co-sign on a mortgage, ensure you talk with a real estate lawyer. That will help you fully grasp the implications of co-signing on a mortgage.

Is it a good idea to co-sign a mortgage?

Prior to signing any type of contract, it is critical to assess the situation and conduct your research, whether you are asking another party to co-sign your mortgage or you are asked to act as co-signer. Co-signing a mortgage is a heavy responsibility financially minus any of the benefits of being a true property owner.

It is important to remember, however, that when you co-sign on a mortgage you are also a partial borrower. If the homebuyer defaults or is for whatever reason unable to make the mortgage payments, you will be on the hook. For that reason, co-signers are usually financially established people like parents or family members.