Co-signing for a Mortgage in Canada – Everything You Need to Know
Buying a home is one of the biggest financial decisions you’ll ever make. For many Canadians, getting a mortgage is essential to achieving their dream of homeownership. However, not everyone can qualify for a mortgage on their own. That’s where co-signing comes in.
Co-signing a mortgage means that someone else, usually a friend or family member, agrees to take responsibility for the loan alongside the borrower. While co-signing can make it easier to get a mortgage, it’s not a decision to take lightly. Here’s what you need to know before you co-sign for a mortgage in Canada.
What is co-signing?
Co-signing is a common practice in the lending industry that involves a person (the co-signer) agreeing to take responsibility for a loan or credit obligation alongside the borrower. The co-signer essentially guarantees the loan, promising to repay the debt if the borrower is unable to do so. In the case of a mortgage, co-signing means that the co-signer is agreeing to take responsibility for the loan in case the borrower defaults on the mortgage payments.
As a co-signer you are 100% responsible for the mortgage payments should the borrower fail to make them – it is not a 50/50 thing. The mortgage will also be considered one of your debts when applying for other credit.
How does co-signing work for a mortgage?
When someone co-signs for a mortgage, they are essentially taking on the same legal and financial responsibility as the primary borrower. This means that if the borrower is unable to make the mortgage payments, the co-signer is responsible for making them instead. The co-signer’s income, assets, and credit score are taken into consideration by the lender when assessing the mortgage application.
Who can be a co-signer?
In Canada, anyone who meets the lender’s qualifications can be a co-signer for a mortgage. Generally, a co-signer should have a strong credit score, stable income, and be able to demonstrate their ability to repay the debt in case the borrower defaults. Co-signers are often parents or other family members, but they can also be friends, business partners, or other acquaintances. It’s important to note that being a co-signer is a serious financial commitment, and the co-signer should fully understand the risks and responsibilities before agreeing to co-sign.
Why co-sign for a mortgage?
Co-signing for a mortgage can be a good option for both the borrower and the co-signer under certain circumstances. Here are some of the benefits for the borrower and the co-signer, as well as some situations when co-signing may be necessary:
Benefits for the borrower:
- Improved chances of getting approved: If the borrower doesn’t meet the lender’s qualification requirements on their own, having a co-signer can increase the chances of getting approved for a mortgage.
- Better interest rates: A co-signer with a strong credit history and stable income can help the borrower qualify for better interest rates and loan terms.
- Lower down payment: In some cases, having a co-signer can also help the borrower to qualify for a lower down payment, making it easier for them to purchase a home.
Benefits for the co-signer:
- Helping a loved one achieve homeownership: Co-signing for a mortgage can be a way for the co-signer to help a family member or friend achieve their dream of owning a home.
- Building credit history: If the co-signer makes timely mortgage payments on behalf of the borrower, this can help build their credit history and improve their credit score.
- Building trust: Co-signing for a mortgage can help build trust and strengthen relationships between the borrower and the co-signer.
Situations when co-signing may be necessary:
- Lack of credit history: If the borrower doesn’t have a strong credit history, having a co-signer with a good credit score can help them qualify for a mortgage.
- Low income: If the borrower’s income is not high enough to meet the lender’s qualification requirements, having a co-signer with a higher income can help them to qualify.
- Self-employment: If the borrower is self-employed and doesn’t have a consistent income, having a co-signer with a stable job and income can help them to qualify for a mortgage.
- Other financial obligations: If the borrower has other financial obligations, such as a high debt-to-income ratio, having a co-signer can help them to qualify for a mortgage.
Risks of co-signing for a mortgage
While co-signing for a mortgage can be a good option under certain circumstances, there are also risks involved. Here are some of the main risks of co-signing for a mortgage:
Legal and financial obligations of co-signing:
- Full responsibility for the loan: As a co-signer, you are legally responsible for the mortgage just as much as the borrower. This means that if the borrower is unable to make the mortgage payments, you will be responsible for repaying the loan in full.
- Impact on credit score: Any late payments or default on the mortgage will not only affect the borrower’s credit score but also the co-signer’s credit score. In addition, the mortgage will appear on the co-signer’s credit report and can impact their ability to obtain credit in the future.
- Liability for legal fees: If the borrower defaults on the mortgage, the lender may pursue legal action to recover the debt. As a co-signer, you may be liable for any legal fees associated with this process.
How co-signing can affect your credit score:
- Higher debt-to-income ratio: Co-signing for a mortgage will increase your debt-to-income ratio, which is the amount of debt you have compared to your income. This can make it more difficult for you to obtain credit in the future.
- Late or missed payments: Any late or missed payments on the mortgage will affect both the borrower’s and the co-signer’s credit scores. This can impact your ability to obtain credit in the future or result in higher interest rates on future loans.
- Default or foreclosure: If the borrower defaults on the mortgage, the co-signer will be responsible for repaying the loan. This can result in a foreclosure, which can have a significant negative impact on your credit score.
Risks of default or foreclosure:
- Financial loss: If the borrower defaults on the mortgage and the property goes into foreclosure, the co-signer may be responsible for repaying the remaining balance of the mortgage. This can result in a significant financial loss.
- Legal action: The lender may pursue legal action to recover the debt, which can result in additional legal fees and expenses for the co-signer.
- Strained relationships: Co-signing for a mortgage can strain relationships between the borrower and co-signer, especially if the borrower is unable to make the mortgage payments and the co-signer is left to bear the financial burden.
How to protect yourself when co-signing
Co-signing for a mortgage is a significant financial commitment, and it’s essential to protect yourself before signing on the dotted line. Here are some steps you can take to protect yourself when co-signing:
Steps to take before co-signing:
- Review your finances: Before co-signing, make sure you can afford to make the mortgage payments if the borrower defaults. Review your budget and ensure you have enough savings to cover the payments in case of an emergency.
- Review the borrower’s finances: Request the borrower’s credit report and financial statements to ensure they can afford the mortgage payments. Look for red flags, such as high debt-to-income ratios, recent bankruptcies, or defaults.
- Consult a lawyer: It’s always a good idea to consult a lawyer before co-signing for a mortgage. They can review the contract and explain the legal obligations and potential risks involved.
- Talk to a Mortgage Broker: A mortgage broker can give insight into what co-signing for a mortgage involves.
Communication and transparency with the borrower:
- Discuss expectations: Have a conversation with the borrower about what you expect from them, such as timely payments and open communication about any financial challenges they may face.
- Keep lines of communication open: Maintain open lines of communication with the borrower and lender throughout the mortgage term. This will help you stay informed about any changes to the mortgage or the borrower’s financial situation.
Keeping track of the mortgage payments:
- Monitor the payments: Keep track of the mortgage payments to ensure they are made on time. Consider setting up automatic payments to ensure timely payment.
- Check credit reports: Check your and the borrower’s credit reports regularly to ensure that the mortgage payments are being reported accurately.
Creating a contingency plan:
- Plan for the worst-case scenario: While it’s important to be optimistic, it’s also important to plan for the worst-case scenario. Consider creating a contingency plan in case the borrower defaults on the mortgage. This may include saving enough money to cover the payments or selling the property.
Co-signing for a mortgage is a significant financial commitment, and it’s essential to protect yourself before signing on the dotted line. Taking these steps can help ensure that you are prepared and informed before co-signing for a mortgage.
Alternatives to co-signing
Co-signing for a mortgage is a significant financial commitment, and it may not be the right choice for everyone. Here are some alternatives to consider:
Other ways to help someone get a mortgage:
- Gift funds: Instead of co-signing, you may consider gifting funds to the borrower for a down payment. The borrower may be able to qualify for a mortgage without a co-signer if they have a larger down payment.
- Joint mortgage: If you plan to live with the borrower, you may consider applying for a joint mortgage. This means that you would be jointly responsible for the mortgage payments, but you would also be jointly entitled to the property.
Alternatives for the borrower if they can’t get a co-signer:
- Improve credit score: The borrower may consider improving their credit score by paying off debts, making payments on time, and avoiding new credit applications. A higher credit score may help them qualify for a mortgage without a co-signer.
- Save for a larger down payment: The borrower may consider saving for a larger down payment to increase their chances of qualifying for a mortgage without a co-signer.
- Consider alternative lenders: There are alternative lenders, such as credit unions or private lenders, that may be more flexible with their lending requirements. However, they may also charge higher interest rates and fees.
Co-signing for a mortgage is a significant financial commitment, and it may not be the right choice for everyone. Considering these alternatives can help you make an informed decision about how to best help the borrower get a mortgage.
For more information on co-signing for a mortgage call: 416-912-6200