Co-signing is a confusing topic for many potential home buyers. If you know or believe you will not qualify for a mortgage on your own, a co-signer can help you get approved for a loan to buy a home. Still, co-signing is a major decision that affects not only mortgage approval but also ownership of your home.
Here's everything you should know about co-signing before you decide it's the right choice for you.
How Co-Signing Works
A lender will consider your income, credit score, and track record of paying debts to determine if you'll get approved for a mortgage. When you are not a strong enough loan applicant to get approved on your own, someone who has a better track record or stronger income can support your application as a co-signer. Co-signers are usually requested by a lender when the applicant is not quite strong enough but close to being approved on their own.
A good co-signer for your mortgage will be strong where your application has weaknesses, whether it's debt, income, or credit rating.
A co-signer is usually a parent or a close relative as the co-signer must be willing to accept legal responsibility for the loan if you default. Anyone with sufficient credit and/or income can co-sign a mortgage, though. There is one important restriction on who can co-sign a loan: as of 2014, the CMHC restricts mortgage insurance to only one property per borrower. This can make it hard for someone who already owns their own home to co-sign for your mortgage.
When to Consider a Co-Signer
If you do not qualify for a mortgage due to your income or you can't qualify for the best terms and rates, a co-signer can help you buy your home as an alternative to a conventional home loan. You may want to consider a co-signer or guarantor if you have:
- Self-employment income that is difficult to document.
- Poor credit.
- No established credit history.
- Missed payments and other derogatory credit marks.
- Difficulty meeting income guidelines.
- A high debt load, especially compared to your income.
- Started a new job and are still in a probationary period.
Co-Signer vs Guarantor: What's the Difference?
Co-signing can be done in two ways: with an actual co-signer or with a guarantor. A co-signer and a guarantor sound very similar, and they are in some ways. Both can help you qualify for a mortgage if you would otherwise be ineligible, but the two have unique responsibilities and rights.
A co-signer will be required to sign mortgage documents. Their name will be on the title of the home because they will legally own the home just as much as the person who pays the mortgage. They will also be accountable for making sure mortgage payments are made on time or be responsible for paying the mortgage if the primary borrower defaults. Co-signers are usually necessary when the home buyer has difficulty qualifying for a loan in terms of income, but credit may also be a factor.
A guarantor has many of these responsibilities with fewer rights. A guarantor only guarantees the mortgage payments if the borrower defaults. A guarantor usually needs better credit and finances than a co-signer. Their name will not be on the home's title. Even though they are equally responsible for the mortgage, they have no claim on the property. Guarantors are usually necessary when the home buyer qualifies in terms of income but not credit-wise.
Multiple Collateral Mortgages
If you're buying a second home or your co-signer has a home already, a multiple collateral mortgage is an option. This type of loan is the same as a standard mortgage but it requires two or more forms of collateral. In most cases, borrowers own several properties or they have a family member or friend willing to leverage their own property for a loan.
This type of mortgage is a good choice for people who have credit and/or income problems but are rich in equity, people who want to finance home improvements, and those who want to consolidate high-interest debt.
Depending on the lender and the qualifications of you and your co-signer, you may not be the only one required to provide collateral. If you're considered a risky borrower, the lender may require that the co-signer put up collateral, too.
Removing a Co-Signer
It is possible to have a co-signer removed from your mortgage once you qualify. When you feel that your income and/or credit has improved, you can request the co-signer be removed from the loan documents. Your lender will re-confirm your employment, debt, income, and credit to determine if you qualify to refinance the loan into your name only. If you're not yet qualified on your own, the co-signer will remain. You can also switch to a new lender when you feel you're ready, but remember that every lender has their own guidelines.
Mortgage refinancing or remortgaging (if you switch lenders) can be complicated and there may be a prepayment penalty if you need to break the mortgage to do so.
If you find yourself struggling to qualify for a mortgage on your own, a co-signer or guarantor may be a good option. Just remember that it is asking a lot for someone to co-sign your mortgage because they will be financially responsible for the loan payments if you default or declare bankruptcy. It's important that you're both comfortable with the commitment.