It keeps getting harder and harder to qualify for a mortgage in Canada thanks to high housing prices and the new mortgage stress test rules. Borrowers are constantly looking for ways to make their application look better, whether that’s by getting a down payment gift or searching for cheaper homes farther away.
One way of improving your mortgage application that doesn’t require any additional money or moving farther away is by getting someone to co-sign your mortgage. Adding someone to your mortgage with good credit and income is a good way to give your application a boost. It won’t overcome major shortfalls but can make up for an application that just doesn’t quite cut it. But should you get a co-signer when you’re applying for a mortgage in Canada? Even though it’s technically free, there are serious consequences for you and your co-signer that you should be aware of.
A co-signer is a person that comes on to a mortgage and guarantees that they will be responsible for the mortgage if the primary borrower isn’t able to pay. The guarantee may convince the lender to give the primary borrower a mortgage because there’s a lower risk to the bank. Two people would have to miss payments for a mortgage to go into default – and since the co-signer should have a strong income, that’s probably not going to happen.
But a co-signer isn’t a magic bullet. If your credit is low or you don’t have a very high income, it’s not likely that a co-signer will solve your problems. A co-signer can’t overcome extremely low credit scores or income, but rather enhance an application that just barely doesn’t qualify.
The key word here is enhance. Your co-signer should be strong in the areas your application is weak in. Is your credit score a few points too low? Then your co-signer should have great credit. Is your income a little weak? Then your co-signer should have a strong income. Do you have a lot of debt? Then your co-signer should have plenty of assets.
If you have poor credit, your best option is to look for a bad credit mortgage lender instead of trying to get a mortgage from an A lender. B lenders have less strict qualifying criteria but charge higher interest rates to make up for it.
There are two ways of becoming a co-signer for a mortgage.
The first is to become a co-borrower. You apply for a mortgage jointly with the person you want to co-sign, and they’re put on both the mortgage and the title to the house. That means they’re equally responsible for the mortgage payments but are also entitled to certain protections as a homeowner.
A co-borrower will own a stake of your home for as long as they’re a co-borrower. They’d be entitled to a portion of the equity in the home if it were to be sold, among other things. Because they’re equally responsible for the mortgage, their credit score will immediately suffer if the main borrower misses a payment. If you go this route, be sure to have open and clear communication, as well as expectations with what to do with the house in case it’s sold.
The other way to co-sign a mortgage is to become a guarantor. Unlike a co-borrower, a mortgage guarantor has no rights to the property, but they’re still on the hook for the mortgage if the main borrower doesn’t pay. Getting a guarantor requires a lot more trust than a co-signer because of the lack of rights, but it is less complicated later on.
Anyone of the age of majority in their province (either 18 or 19) can become a co-signer, but that doesn’t mean they should.
Remember, you bring on a co-signer if your own credit or income isn’t high enough to qualify. The lender may ask why a specific person would be willing to take you on as a risk. That’s why the best co-signers are close family of the borrower, such as their parents, aunts or uncles, or grandparents. Friends, younger relatives, and business acquaintances aren’t looked at as favourably. It’s best to get help from people established in their careers.
Before you ask someone to become a co-signer, you should think about what you’re asking of them. It’s a big responsibility! Whether they’re a co-borrower or a guarantor, they’ll be 100% on the hook for the mortgage if you stop making payments. You may have the best intentions, but it’s still possible you may not be able to make payments on time. That could end up costing your co-signer thousands of dollars and may adversely affect their credit score.
If you get a co-borrower, their ability to get a loan for themselves afterwards is affected. Since a co-borrower takes on the mortgage, their own debt load is increased. A lender may see their mortgage and decide that they have too much debt already to take on another loan, even if the main borrower is the one making 100% of the payments.
The co-signer is still liable for the mortgage in the event that the main borrower passes away, which can have serious consequences. If the co-signer was expecting the main borrower to make the payments, they may not have enough cash flow to be able to carry that mortgage PLUS whatever debts they personally have.
Co-signers registered on the title of the house are in a better position than guarantors in this instance, since they can choose the sell the house to clear the debt. But if the co-signer was just a guarantor, they have no property rights. If there was another owner, they decide what happens to the property, which can result in financial hardship for the guarantor.
On the other hand, if the co-signer were to die the main borrower isn’t affected as badly. There is a clause in the mortgage contract that decides what happens after the death of a co-signer, called the “succession clause” (or something similar). This clause transfers the liability from the living person to their estate. Even though they’re not alive, they’re still responsible for the mortgage.
Depending on the size of their estate, their estate could actually run out of money, leaving none for the heirs. That would only happen if the main borrower stopped making payments.
Eventually you’ll want to remove a co-signer from your mortgage. Either you’ll be in a position to get a mortgage on your own, or your co-signer will want to be free of the responsibility. Whatever the reason, it’s possible to remove a co-signer, although it requires more effort than just crossing their name off of the mortgage contract.
A co-borrower can be removed from the title without also being removed from the mortgage, but your co-signer probably won’t want that to happen; it gives them all the liability of your mortgage without any of the security of homeownership. If you’re planning on removing someone from the mortgage, also consider getting them to relinquish their property rights, too.
Your lender won’t be too eager to remove a co-signer. It makes their loan riskier as the person they were relying on to pay if you didn’t would no longer be responsible.
To convince them to remove a co-signer, you have to prove that you’re able to handle the mortgage by yourself. Usually that requires a few years of on-time payments and improving your credit score.
If you don’t want to stick with your current lender, you can refinance your mortgage with someone else.
Keep in mind that refinancing your mortgage to remove a co-signer requires you to qualify for a mortgage loan without your co-borrower. Just like asking your current lender, you’ll have to build up your credit and/or income to prove you can handle the mortgage by yourself.
If your co-signer wants out but you’re not in a position to qualify for a mortgage on your own, you may want to sell the property.
A co-borrower has property rights, so they are entitled to sell the house if they want to. However, a guarantor has no such rights, and can only ask nicely for the house to be sold.
Once the house is sold, the co-signer is released from all liability, since there’s no longer a mortgage.