If you are an applicant, continue to read on. But if you have been asked to co-sign a mortgage, skip to our co-signer section.
If you have decided that you are ready to purchase a house but have not had any luck getting approval for financing, one possible solution is to get someone to co-sign the mortgage loan with you like your parents or a close friend. People like yourself need to use co-signers for their mortgages in Canada for a number of reasons. In addition to weak credit or a high personal debt-to-income ratio, the primary borrower could also have an unstable employment history. They might have been divorced for several years, but their name could still appear on the mortgage for the property where their former spouse lives. It could also be someone who has gone through bankruptcy several years before and has spent the intervening years getting back up on his feet.
Does this sound like you? If so, not to worry because there are many benefits!
Requirements For Becoming A Mortgage Co-Signer
What credit score does a cosigner need? When you go in to apply for a mortgage with a bank or other traditional lender — or even some of the subprime options — your credit score is going to be an important factor. The higher your credit score is, the more likely it is that you’ll get approval, and the lower your interest rate is going to be. If late payments of excess debt have your score down, you might think about waiting to apply for a mortgage until your finances are in better shape. However, if you have already shed the debt but are still waiting for your credit score to respond, bringing in a co-signer for the house loan who has a better credit score can help you gain approval more easily — and at a lower interest rate.
Another benefit has to do with the amount of the loan for which you can qualify. Lenders use a specific debt-to-income ratio to determine how much financing they are willing to extend. If you have a second income attached to the application, then you will be able to qualify for a bigger mortgage. Of course, if the co-signer isn’t going to occupy the house with you or benefit from the mortgage in any way, you want to make sure that you can afford the payments on your own.
Banks like applicants who have a steady employment history that shows a regular track record of income. If your job history has been choppy or if you are self-employed, having a co-signer who has had a stable job for a long time can make a big difference on your application. The bank will be impressed with his or her employment history and that may make the difference in getting approval for you.
Before you go in with a co-signer, though, there are some steps you need to take first. First, make sure that the co-signer will help you as much as you think he or she will. Sometimes people aren’t aware of shortcomings in their own credit score because they don’t monitor it regularly. As a result, they can end up harming your application and keeping you from getting approval. Also, you’ll want to sign a contract with your co-signer. Even if the co-signer is your parent, a relative or best friend, you want to keep things professional between the two of you on this. This will help you outline the responsibilities that you have on the loan in writing and keep things from becoming awkward if you are late on a payment or you run into some other issues on the loan.
Now that you are aware of the requirements and benefits it’s time to determine who should you ask. Continuing reading as well walk you through choosing a solid candidate.
Who Should You Ask?
If you are an applicant, you might begin by asking friends or relatives to be your co-signer. Do not do this unless you have the means (and the intention) to make your mortgage payment each month. Co-signing a mortgage is a major act of trust for a person to make for you, and if you jeopardize that person’s credit by falling behind on that mortgage, you are likely to damage the relationship beyond repair. Do not ask a friend or relative who is already in precarious financial circumstances. First of all, his credit is not likely to be high enough to help your application receive approval from the bank. Second, if you fall behind at all on your payments, that will place considerable stress on your relationship.
If someone has asked you to co-sign a loan with him, there are several things to consider before you go in and fill out the paperwork. How reliable is your friend or relative? If he does not make the payments one time — or at all — your credit history will receive the same bashing that his does. This mortgage also factors into your debt-to-income ratio and can influence your ability to get additional financing of your own.
When you go to the bank to apply for a mortgage with a co-signer, you can both expect to go through the same process of having your income verified, your bank accounts checked and your credit reports retrieved by the lender. Both of you have to receive approval from the lender for the mortgage to go ahead. If your combined credit and income are not good enough for the lender, then you are not likely to receive the funding.
So, before you go to the bank with a co-signer, it might be good to sit down with a credit professional and go over your own situation. If you can get your credit score high enough for approval on your own within a matter of months, it might be worth waiting and doing the application then, particularly if you have enough income coming in to make the monthly mortgage payments. If you are a year or two away but have recently received a cash infusion because of a relative’s death or a bonus at work, and you want to use that for a down payment, and your salary is enough to comfortably make the mortgage payments within your budget, then getting a co-signer on a loan for a two- or three-year term might be wise. Then, by the time the loan comes up for renewal, you will have the credit score that you need to renew on your own.
So you’ve been asked to co-sign for a mortgage in Canada. Read on as we’ll educate you on everything you need to know so you can make a sound decision.
To Be a Co-signer or Not to Be…That is the Question
By becoming a co-signer, you’re agreeing to take on the responsibility of the loan alongside the person taking out the loan. For people who want to apply for a mortgage but have weak credit, getting a co-signer with better credit or with a more stable employment history can make the process go more smoothly. Basically, a co-signer is also liable for the terms of the mortgage and also has an interest in the purchase of the home. Married couples who co-sign are each receiving a 50 percent interest in the home. If a single person has a friend or relative co-sign, that friend or relative also has a 50 percent interest in the home. A guarantor provides a similar benefit to the primary borrower, but the guarantor is linked to the loan with a guarantee, but the responsibility of the guarantor can end before the loan has been repaid in full. If you would rather use a guarantor to bolster your credit, your own income must be enough to make the entire mortgage payment within the lender’s debt-to-income ratio guidelines, and your employment history must be stable enough for the lender to trust that you will have the means to keep making the payment without regular assistance from the guarantor. While a co-signer is assumed to be making regular contributions to the payment — which is why he receives an interest — a guarantor is seen more as an emergency source of funds.
Here are some frequently asked questions on co-signor guarantors.
Guarantor Vs Co-signer – Co-Signing Or Guaranteeing A Mortgage?
Getting mortgage approval is often difficult for borrowers with poor credit, insufficient income, the lack of down payment, or employment history that shows a lot of movement. However, if you have someone who will act as a guarantor or a co-signor for your mortgage, you can improve your odds with a bank significantly.
A lot of people use the terms “guarantor” and “co-signor” as though they mean the same thing, but the roles are actually quite different. If someone acts as our co-signor, their name goes on the title as well, and they share the legal responsibility for making the payments. A guarantor has put down a personal guarantee if you default on the payments, but his name does not appear on the title, so he has no right to the property.
There are several reasons why banks might require a guarantor or co-signor. If you need to boost your income, a co-signor can cover the gap. This person also has to come to closing and sign all the mortgage paperwork because his name appears on the title as well, until the borrower qualifies for his own loan and can take over the note.
If the borrower has enough income to qualify but has other issues, such as a lack of credit history or credit that is less than stellar, a guarantor can come in and make the lender happy by boosting that overall credit score.
Advice for guarantors
If someone has asked you to be a guarantor, you need to have a strong financial position – because you are promising to satisfy the whole debt for the mortgage if the borrower defaults. If you agree to serve as one, the lender will look closely at your credit, and you also have to disclose your income, assets and liabilities.
Because you’re considering taking on such a huge potential liability, you need to trust the person for whom you are acting as guarantor – particularly in their ability to make the payments each month. We recommend that anyone considering acting as a guarantor talk to a lawyer about all of the obligations – a lawyer who is outside the transaction.
Just in case things do go into default, the guarantor and borrower should have an agreement in place regarding collateral or a repayment plan.
If the borrower has made payments on time for a year and has improved his credit sufficiently, some lenders have policies that allow the guarantor to step out of the obligation. This is a question that you will want to go over with the lender before signing any paperwork. Your guarantor status appears as debt on your own credit report, so make sure that you can handle that impact if you want to buy a home or a car in the time period when you will be a guarantor.
If you have any other questions about the co-signing a mortgage process in Canada, contact Amansad Financial – and also reach out to a real estate attorney to get independent legal advice pertinent to your own situation.