Co-Signing A Mortgage In Canada: What You Need To Know
By co-signing a mortgage in Canada, you can help a child or other close family member who may be having difficulty obtaining a mortgage on their own.
However, there are risks associated with co-signing a mortgage. As a co-signer, your credit and financial health may be impacted if the primary borrower struggles to meet their mortgage obligations.
In addition, your ability to obtain your own credit products might be limited, as lenders will consider the co-signed mortgage as part of your debt-to-income ratio. For these and other reasons, it’s critical to understand the implications before you decide to co-sign on a mortgage.
What Is A Mortgage Co-signer?
A mortgage co-signer is an individual who adds financial weight to your mortgage application, allowing you to qualify for a loan that you may not have been able to obtain on your own. They essentially promise the lender that they will cover the mortgage payments if you, the primary borrower, default or cannot afford the mortgage loan payments.
This can be a good arrangement for both parties; the primary borrower can secure their dream home with your help, and you can assist a family member or close friend on their homeownership journey.
The co-signer’s role lasts until you pay off the loan or until you can refinance and remove your co-signer’s name from the contract as your financial situation improves.
Mortgage Co-signer vs. Guarantor: What’s the Difference?
When you’re trying to get a mortgage, having a co-signer or a guarantor can sometimes be the difference between your application getting approved or declined. While both roles are designed to help you qualify for a mortgage, they are not the same thing.
A mortgage co-signer acts as a joint applicant on the mortgage application and shares full responsibility for the mortgage loan. The lender considers the co-signer’s credit history and income when approving the application.
If you, as the primary borrower, cannot make the mortgage payments, the lender will expect the cosigner to step up and ensure the payments are made. If the co-signer fails to do so, their credit score, and that of the main applicant, may be impacted.
A mortgage guarantor is not considered a borrower on the mortgage application. Instead, they guarantee the repayment of your loan. Unlike a co-signer, a guarantor is not on the title and is often not required to sign all of the mortgage paperwork. Their primary role is to step in and cover the payments if you default on your mortgage. This arrangement means a guarantor’s credit score is only affected if they fail to fulfill their obligation to cover missed payments.
It’s important to note that a co-signer has a right to the property, while a guarantor does not. This means if you decide to sell your home, the co-signer can lay claim to a portion of the proceeds, whereas a guarantor has no right to the property or any proceeds from its sale.
Both mortgage co-signers and guarantors provide additional financial support and allow you to qualify for a mortgage that you might not be able to obtain on your own. However, their roles, responsibilities, and rights differ significantly. It’s crucial for you, your co-signer, or guarantor to understand these differences before you enter into any agreements.
Who Can Co-sign on a Mortgage?
A co-signer is usually a close family member who is financially stable, with low debt levels, and an excellent credit score. A family member is more likely to be invested in your success and willing to put themselves at financial risk to help you get a mortgage.
Co-signers are often parents who have decided to help their adult children get a mortgage, but other family relationships may also be acceptable to the lender. Friends may also be able to co-sign if they meet the required criteria.
What Are The Requirements of Being a Co-signer?
It’s critical for a co-signer to have a well-established credit history, including a strong credit score. This will reassure the lender that there’s a backup in place if you, the primary borrower, cannot make payments.
A co-signer must also have good job stability and a strong income. In fact, their income must be high enough to debt service the entire mortgage independently, without the primary applicant, in addition to covering their existing mortgage or rent payments. This requirement disqualifies many people from being able to co-sign for someone else.
Why You Might Need a Mortgage Co-signer
There are a few reasons why a lender may require a borrower to obtain a co-signer in order to approve their mortgage. Here’s a closer look at some of the deciding factors:
Your Credit Score Is Too Low
If you have a low credit score, lenders will see you as a risky borrower. By adding a co-signer with a high credit score, you can reassure lenders of your ability to repay the mortgage, thus increasing your chances of approval.
By co-signing the mortgage, the co-signer puts their own credit on the line, which is why it’s so important to make timely mortgage payments to protect both your credit scores.
You Have Minimal Credit History
Having a limited or non-existent credit history can also make it difficult for you to qualify for a mortgage, even if you have stable employment and enough income to qualify.
Without an established credit history, lenders have little information to evaluate your borrowing habits and reliability. By having someone with a strong credit history cosign your mortgage, lenders will have additional confidence in your ability to repay the loan, making it more likely for you to be approved.
You Have a Brief Employment History
A stable income is one of the most critical factors for lenders when considering your mortgage application. When you don’t have a long employment history, lenders might be hesitant to approve your application.
By adding a mortgage co-signer who has a stable income and steady employment history, lenders will be more willing to grant you a mortgage, as they have the reassurance that if you default on your payments, the co-signer will be able to make them.
Risks of Co-signing on a Mortgage
When you decide to co-sign on a mortgage for a friend or family member, you may put yourself at financial risk. It’s important to understand the potential consequences before taking on this major responsibility.
The obvious risk that a co-signer faces is becoming responsible for the mortgage payments if the primary borrower fails to make them. If the borrower misses payments or makes late payments, you’ll be on the hook to pay the debt. This can be particularly tricky if you have your own financial obligations and expenses to manage, as you may be unable to keep up with the added mortgage payments.
Additionally, your credit score can be negatively impacted by missed or late payments on the mortgage you’ve co-signed for. Since your credit report is linked to the mortgage, any payment issues can lead to a decrease in your credit score.
You also need to consider that cosigning on a mortgage can limit your ability to obtain new credit for yourself. Lenders will consider the cosigned mortgage as part of your debt load when assessing your creditworthiness. This might make it harder for you to qualify for additional loans or mortgages, potentially affecting your future borrowing opportunities.
Lastly, your relationship with the primary borrower can also be at risk. If the borrower struggles to make payments or defaults on the loan, it can create tension and strain in your relationship. It’s essential to weigh the potential damages to your personal relationships when considering whether to co-sign a mortgage.
Can a Co-signer Be Removed from a Mortgage?
There are a few scenarios in which you can be released from your obligations as a co-signer.
One of the most common ways to be removed is through refinancing. In this process, the primary borrower takes out a new mortgage to replace the existing one. However, for this to happen, they must now be financially stable enough to handle the loan repayment on their own.
In some cases, you may be removed from the mortgage account after a certain length of time, as specified in the initial mortgage agreement. This often happens when the primary borrower has made consistent, on-time payments and has improved their credit score substantially. Make sure to review the terms of your mortgage agreement to see if there is a clause outlining a specific timeframe for cosigner removal.
Another possibility for cosigner removal is if the primary borrower decides to sell the property. Upon the sale of the property, the mortgage will be paid off, and you will no longer be responsible for the loan repayment. However, this option depends on the primary borrower’s decision to sell and may not be under your control.
While co-signing a mortgage can help someone secure a loan, it’s essential to remember that it comes with responsibilities. Always be prepared to carry out the role of a cosigner and understand the different ways you can be removed when the time is right.
Should You Become a Mortgage Co-signer?
If you’ve been asked to co-sign a mortgage for a family member, you need to carefully consider the implications it may have on your personal finances. Becoming a cosigner means you’re committing to take responsibility for the loan in case the primary borrower defaults. This can affect your credit score if payments aren’t made on time, so you really need to trust the primary borrower to make timely payments.
Also, remember that co-signing a mortgage is not a temporary arrangement. If the borrower cannot qualify to have the mortgage moved into their own name down the road, you may be on the mortgage for several years. Does that possibility fit with your own financial goals?
If you still have questions about becoming a co-signer, I recommend seeking advice from a real estate lawyer or other mortgage professional, like a mortgage broker or bank advisor.
Does a mortgage co-signer have to be on the title in Canada?
In most cases, a co-signer must also be on the property title. This is something that should be important to the cosigner, considering that they are sharing financial responsibility for the mortgage loan.
What are the risks involved in cosigning a mortgage for someone in Canada?
When you co-sign a mortgage in Canada, you take on the responsibility of repaying the loan if the primary borrower defaults. This puts your own credit at risk and can negatively affect your credit score if payments are not made on time. Additionally, co-signing a mortgage can impact your ability to qualify for future loans, as your debt-to-income ratio will increase with the addition of the mortgaged amount.
How can a co-signer be removed from a mortgage in Canada?
The primary borrower can try to refinance the mortgage in their own name. To do this, they must prove their financial stability by showing good credit, consistent income, and an improved debt-to-income ratio, which might take some time, depending on their financial circumstances.