May 16, 2022

Co-sign on a Mortgage in Canada

Co-sign on a Mortgage in Canada

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There is a lot of evaluation that goes into getting approved for a mortgage loan here in Canada.  In order to qualify, there are many criteria a prospective lender will consider before approving a mortgage.  Sometimes, an applicant will fall short in one or more of these measures.  There are times when the only way a lender will approve the loan is if someone agrees to co-sign with you.  In this way, your co-signer agrees to take on responsibility for the mortgage, should you not be able to.

Here’s a look at what you should know when considering enlisting the help of someone to co-sign a mortgage loan for you.

What Goes into a Mortgage Approval

Any lending institution – such as a bank, credit union, B-lenders, and even private lenders – will assess a number of specifics regarding your finances when you apply for a mortgage.  These may include items such as your:

  • Credit history
  • Income
  • Current employment status
  • Outstanding debts
  • Etc.

The reason for this assessment is that a lender is themselves taking on risk when they issue a mortgage.  They want to be certain that the money they lend is repaid.  All the information your supply is compiled into an overall credit score.  If you have an established history of good credit, and all other parts of the assessment process check out, such as your down payment amount, your income. etc., your mortgage loan will likely be approved without a hitch.  If the opposite is the case – you have no credit history, or your credit rating is judged to be low, then a lender may ask for a co-signer in order to approve the mortgage.

What is the Role of the Person Who Co-Signs a Mortgage?

When the situation arises that you don’t qualify for the mortgage you’ve applied for, you may need to enlist the help of a co-signer to get it approved.  When this happens, the co-signer agrees to take responsibility for repayment of the loan with you, the primary applicant.  

The person who co-signs the loan is named to the property title – this in fact makes the co-signer a part owner of the property you are purchasing.  As such, they will be considered responsible for the mortgage in the event that you, as the primary holder, fall behind on your payments.

As well, the addition of a co-signer on your mortgage may allow you to qualify for a mortgage loan that is larger or has more favourable terms than were originally being considered.  

In short, a co-signer is a surety – an individual who is willing to assume responsibility for your debt obligation.  It’s an important designation.

Who is Eligible to Be a Mortgage Co-Signer?

The fact is that just about anyone, theoretically, could act as a mortgage co-signer – there really are very few restrictions, so long as their qualifications such as those already mentioned – credit history, etc. – are solid.  In reality, however, the vast majority of mortgage seekers don’t go very far in their search for a co-signer – most of the time, they are either family members, or very close friends – those individuals most likely to be willing to put their own financial standing at some risk on behalf of someone else.  In many instances, for example, younger people will ask their parents to co-sign for their mortgage.  They might also seek out this kind of help from other relatives or godparents – someone they know and trust, and who will trust them back, in terms of fulfilling their mortgage repayment obligations.

It’s important to stress that an individual who agrees to co-sign on someone else’s mortgage is taking on considerable personal risk and responsibility.

The Responsibilities and Liabilities of a Mortgage Co-Signer

Being a mortgage co-signer brings with it a number of responsibilities.  That’s why it’s critical that they have complete faith and trust in the party with whom they are partnering on a mortgage loan.  As co-signer, they are making a guarantee to the lending institution that all repayments will be made according to the schedule.  Should the mortgage holder fall behind or default on the mortgage loan, the co-signer becomes responsible.  A co-signer therefore needs to carefully consider the individual they are willing to sign for.  It is not a mere formality to sign onto the mortgage documents as a surety.  There are serious financial implications that come along with it.  It’s also imperative that the primary mortgage applicant thoroughly think through the potential exposure their co-signer is taking on by helping them in this fashion.  

Keep in mind that the only instance in which a co-signer is required during the course of a mortgage is if the primary borrower is not keeping up their end – i.e. making payments as per the schedule agreed to.

A mortgage co-signer can also play a role in how much money is ultimately approved for the primary borrower.  The financial standing of the co-signer can increase the amount the lending institution would be willing to provide for a mortgage, based on the co-signer’s credit worthiness.

It’s also significant to point out that even with a solid co-signer on board, it does not automatically guarantee a mortgage loan will be approved.  This remains solely at the lender’s discretion.  An example of this would be if the primary borrower has an exceptionally low credit score or history, or some other extenuating circumstance – the bank, credit union, or other lending institution may simply not want to take them on as a client, regardless of the standing of their co-signer.

What a Mortgage Co-Signer Should Do When Co-Signing a Mortgage Loan

We should reiterate here: A mortgage co-signer needs to enter into this type of agreement fully informed.  There needs to be total transparency, along with trust, between a co-signer and the primary mortgage holder.  While this may seem like a difficult conversation to have with a relative or close friend, it’s imperative that everything be on the table before any signature is put to paper.  A co-signer must be as informed as to all the loan details and circumstances as the primary loan applicant – this is no time for unwelcome surprises.

The co-signer must have complete confidence in the party they are acting as surety for.  While they may not qualify for the mortgage themselves, based on their credit score or other extenuating circumstances, they still need to be fiscally responsible individuals. The co-signer should establish and confirm this reliability from their partner very early in the process.

A crucial part of this trust and transparency when co-signing a loan is to have exactly the same information and documentation as the primary mortgage holder.  This should include the following:

  • The co-signer needs to obtain all of the relevant correspondence, paperwork and contracts.  Everything needs to be understood and acknowledged well in advance of signing on.  Also, consideration should be given to consulting with a lawyer, if for whatever reason, something does not appear clear, or requires explanation.  Leave no part of the documentation to chance.
  • The co-signer should request and receive access to the primary borrower’s mortgage account.  That way they can be sure of the payment schedule and that the required repayments are being made.  
  • It is a good idea for the co-signer to request the primary borrower obtain mortgage life insurance.  This will add greatly to the certainty that all repayments will be made – even in the event of the primary mortgage holder’s death or serious injury which may leave them incapacitated and unable to make payments.

Taking all of the above steps will go a long way to minimizing a mortgage co-signer’s exposure and potential liability. Be informed and prepared for any eventualities.

What are the Advantages of Having a Co-signer on a Mortgage?

The main advantage of having a co-signer on a mortgage loan is that it helps a borrower get their mortgage loan approved, if it’s been proven to be difficult or impossible otherwise.  A secondary advantage is that having a co-signer on board could help with the terms of the mortgage agreement – for example, a larger mortgage might be approved.  

Under no circumstances should a borrower engage with a co-signer if they have any doubts whatsoever about their own ability to pay back the mortgage they are signing onto.  The co-signer is not to be viewed as a mortgage holder’s substitute payment maker.  It is never intended that a mortgage co-signer take over repayment of the loan.  The primary borrower must be certain of their ability to take on the entire responsibility of the agreement.  A co-signer should not even be considered some sort of periodic backup.  They should be viewed only as someone who has complete faith in you to make all payments on your own, and are willing to sign on those terms.  A co-signer should only be called upon in extreme, last resort situations.

What are the Disadvantages of Having a Co-Signer on a Mortgage Loan?

The major disadvantage to the primary borrower on a mortgage is that a co-signer becomes a part-owner of the purchased property.  We’ve gone over the role of the co-signer – they are strictly there to, in effect, vouch for the borrower’s ability to make repayments.  But the net result is that they have signed onto the mortgage agreement, which means their name is attached to the property title.

There are several disadvantages to being a co-signer on a mortgage.  The primary one is the large financial risk that comes along with co-signing.  Although one co-signs on a loan with the confidence that the borrower will make all payments in a timely fashion, the risk still exists that they will be on the hook for the mortgage repayment should something go awry.  

Additionally, the co-signer may be limiting their own borrowing power.  Should some need come up wherein the co-signer needs to borrow funds for themselves, their existing exposure on someone else’s mortgage may prove a hindrance.  

One last disadvantage to be mindful of for both parties is the potential effect on their personal relationship.  Financial matters are deeply personal.  Two parties’ signatures on a mortgage document could lead to unwanted and unplanned for strife down the road.  Both partners in this type of arrangement must think through, in advance, the potential consequences of entering into a loan agreement such as this.

Final Thoughts – to Go with a Mortgage Co-Signer or Not

Probably the best advice as to whether or not to go with a co-signer on a mortgage loan is to use the option as a last option, when all other avenues have been exhausted. The primary borrower should be 100% sure of their own ability to repay the loan as per its schedule.  Never should a borrower count on a co-signer to make payments.

Likewise, the party co-signing on a mortgage loan should have complete confidence in the primary’s borrower’s ability to handle the mortgage by themselves.  We’ve outlined the potential detriments to being exposed to such potential financial liability. The co-signer must go into any such arrangement with eyes wide open.  Both parties must be aware of their responsibilities.

We hope you have found this information interesting and valuable. If you have questions, consider contacting a mortgage advisor today.

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