Thinking about what it will mean if you co-sign for a mortgage? With the rising housing costs in Canada, it can be difficult for an individual to qualify for a mortgage loan.
Luckily, there are other options for individuals who do not qualify for a mortgage on their own. Having someone co-sign a loan is one such option.
However, co-signing a mortgage is a risk that no one should take lightly. Before co-signing a mortgage, it is important to educate yourself and make an informed decision.
With decades of experience in the mortgage industry, we are here to help you evaluate the potential benefits and risks of co-signing a mortgage.
Read on to learn all about co-signing so that you can make an educated decision before becoming a co-signer.
What Does It Mean to Co-Sign for a Mortgage?
Co-signing a mortgage is a great way for individuals to get approved for a loan that they would not qualify for on their own.
Lenders evaluating a loan application must factor in the risk of loaning to an individual. They look at the applicant’s credit score, debt-to-income ratio, and employment history. If the applicant for the mortgage is lacking something in their application, a co-signer can fill the gap.
A mortgage co-signer is someone added to the application to fill in for any missing income, credit, or asset requirement. In doing so the co-signer says that they will step in if the primary applicant for the loan is unable to make a payment for any reason. This mitigates risk for the lender.
Requirements for Being a Co-Signer
In Canada, there are a few requirements to becoming a co-signer. There are no strict relationship requirements. However, many people have a spouse or parent co-sign for a mortgage because of the level of trust and risk involved.
Having a co-signer does not automatically mean that an individual will get approved for a loan. There are a few factors to consider when choosing a co-signer.
The purpose of adding a co-signer to a loan application is to make the application look as strong as possible. Bringing a co-signer who fills a gap, whether in credit score or income, is the best option to qualify for a loan.
Thus, a high credit score and low debt-to-income ratio are important when considering a co-signer. A co-signer who already has a mortgage payment may not be a good option since their debt-to-income ratio will be high.
If you have been denied a loan and are considering adding a co-signer, contact us to see what is missing in your application to learn what to look for in a co-signer.
Risks of Co-Signing a Mortgage
There are many factors to consider when thinking about co-signing for a loan.
Being a co-signer on a loan can be a great way to help a friend or family member purchase a house. The advantage of having someone co-sign a loan is that the applicant may be able to qualify for a loan that they wouldn’t qualify for on their own. However, there are some pretty serious risks involved.
Risk of Missed Payments
Being a co-signer for a mortgage means that you are taking on both the assets and liabilities of the home. You are considered a homeowner even if you do not live in the home. This also means that you are responsible for any payments that the initial applicant is unable or unwilling to make.
In addition to being responsible for paying off the loan, your credit score can be affected by any missed payments. The plus side is that payments made on time will build your credit score. But, if the initial applicant for the mortgage fails to pay off the loan it can negatively impact your credit score.
Future Lending Risks
Because you are taking on the responsibility of the loan, any future lender will see the mortgage as a debt you have. This can make it difficult for you to get a loan in your own name because of your high debt-to-income ratio.
Here’s an example that illustrates this point. Say you are co-signing on a loan and the initial applicant will pay $2000 a month for the mortgage. If you apply for a mortgage or car loan, a lender will see the $2000 as a debt that you owe. Even if you are not making the payments yourself, this debt is in your name.
You may be denied the loan because your debt-to-income ratio is too high.
Removal From Mortgage Contract
It is not always easy to get out of a mortgage after co-signing.
To be removed from the mortgage, the initial applicant must be able to qualify for the loan on their own. This means that whatever gap you stepped in to bridge must no longer exist.
For example, if you stepped in because their credit score was too low to qualify, they will have to raise their credit score to refinance their loan.
Likewise, if you stepped in because the initial applicant’s debt-to-income ratio was too high, they may need to raise their income level or pay off other debts before you can be removed from the loan.
In any case, there is no guarantee that you will ever be removed from the loan. The responsibility you take on when co-signing can last for years to come.
Risk of Relationship
Finally, it is important to consider the relationship between the initial applicant and the co-signer. Should anything go wrong, there may be a strain on the relationship.
Of course, nobody goes into a co-signing contract thinking that things will go wrong. However, unforeseen circumstances beyond your control may damage an important relationship. Before entering such a long-term contract, consider the potential consequences.
If you co-sign for a mortgage
With so many risks involved, becoming a co-signer on a loan is not something that should be taken lightly. While it can be a great way to boost a mortgage application, the long-term impact on the co-signer must be taken into consideration.
If you have any further questions about co-signing or any other mortgage needs we would be happy to assist you. Click here to set up a call with one of our knowledgeable mortgage brokers.