Should you co-sign a mortgage loan? In the last twenty years, home prices have risen a staggering 375% across the country, on average. In some cities, that requires a six-figure down payment. Canada’s housing crisis is making it even more difficult for people with good credit and gainful employment to access affordable housing. More Canadians are asking their family or friends to co-sign a mortgage to increase their odds of approval. But is it a good idea? Before you sign on the dotted line, make sure you understand your responsibility as a co-signer. It’s not the same as a co-borrower or joint-applicant, and there are risks involved. Let’s take a look at what it means to co-sign a mortgage in Canada.
What does it mean to co-sign a mortgage?
When you co-sign a mortgage loan, you are agreeing to make the mortgage payments in the event the home buyer defaults. You enter into a legally binding contract with the mortgage lender that gives them the legal right to pursue you for payment. In order to co-sign a mortgage loan, you must prove to the lender that you are creditworthy and can afford the financial responsibility of the mortgage.
Most co-signers are essentially co-borrowers. The lender will treat you same way they treat the homebuyer when it comes to the mortgage loan. You must go through the mortgage application process, just as the homebuyer did, which includes a credit check, verification of your income, assets, and debt obligations. You are just as responsible for the mortgage payment as the homebuyer, so the lender must ensure you meet their mortgage qualification criteria before they will consider you as a co-signer.
Traditionally, a borrower would need someone to co-sign their mortgage loan if they have a poor credit score, unconventional or difficult to verify income, or otherwise considered too high risk in the eyes of the lender. When you co-sign a mortgage, you make the loan less risky to the lender by guaranteeing you will pay the mortgage if the homebuyer can’t. Lenders are much more likely to lend to those who have a qualified co-signer.
However, as home prices across the country sky-rocket, even creditworthy mortgage applicants with good jobs are turning to co-signers to help them get approved for a mortgage. So while you may be in a position to make someone’s dream of homeownership come true, there are certain risks involved. Let’s take a look at your rights, responsibilities, and things to consider before you co-sign a mortgage.
Who pays the mortgage?
The homebuyer is the primary borrower. Therefore, the mortgage payment, and all associated homeownership costs, are their responsibility. But really, the lender is going to hold to you the same standard, meaning you are just as responsible for managing the mortgage loan appropriately. Most lenders prefer that mortgage payments be set up for auto-payment out of a borrower’s chequing account. In that case, the payment will come out of the primary borrower’s account, not yours, depending on the arrangement between the two of you. But since you are just as financially responsible for the mortgage, if the primary borrower cannot make the payment, the lender will come looking for you. You will have to make the payment to keep the mortgage loan in good standing, and to protect your credit too. You are also on the hook for any late payment fees or accumulated interest.
Who owns the property?
In most cases, a co-signer does not have any ownership rights to the property itself. The primary borrower retains most of the rights to the property and is responsible for general repairs, upkeep and upgrades to the property. They also have the right to make changes to the property or sell anytime without the co-signers permission, depending on the agreement. Most co-signers are only responsible to make the mortgage payment if needed and are not always named on the title of the property.
Co-signing a mortgage and your credit score
When you co-sign a mortgage, your credit score can be affected. First, you must apply for the mortgage the same way the homebuyer did in order to prove your creditworthiness and confirm your financial situation. Therefore, you must submit to a hard credit check which could affect your credit score depending on how many other credit checks you’ve had recently. The fewer inquiries you have on your credit report and the higher your credit score, the less a credit check will impact you. Second, when you co-sign a mortgage it appears on your credit report as well as the homebuyers credit report. If they miss a payment, it will report as such and can hurt your credit score as well as theirs. On the other hand, every time a payment is made on time that can help boost your score too.
Are you responsible for the mortgage until the house is paid off or sold?
Not necessarily. Sometimes the primary borrower’s financial situation improves over time and they may not want you co-signed on their mortgage anymore. In that case, they must demonstrate to the lender they can manage the mortgage themselves. If approved by the lender, you and the borrower will sign a form that releases you from your legal and financial obligations.
Alternatively, you can request to be released from the mortgage, but the same logic applies. The primary borrower must be creditworthy and able to afford the mortgage themselves. If the lender does not approve the request for release, you will continue to be responsible for the mortgage payment in the event the primary borrower cannot keep up with the payments.
Whatever the case, most financial institutions will require the primary borrower to go through the application process again to prove their financial stability. In some cases, that may include breaking the mortgage term early, which can come with a financial penalty. Each lender is different in how they handle the release of a co-signer, or if they even do it all. If you would like to be released as a co-signer, speak to the lender about the process and how it will impact both you and the primary borrower.
Co-signing a mortgage and property rights
Co-signing a mortgage can be risky. Sometimes co-signers want some rights to the property so they have a say in what happens to it. Other times, two or more people apply for a mortgage together and want joint ownership of the property. Let’s take a look at the different ways you can co-sign a mortgage and how they differ from each other.
When you guarantee a mortgage, you are called a guarantor. In this arrangement, you are simply there to promise the lender the mortgage payments will be made no matter what. However, you don’t actually sign the mortgage loan documents, you are not added to the property title, and you do not have any ownership rights to the property. You are simply there to “juice up” the homebuyer’s application to help them get approved for a mortgage.
However, you won’t have any other legal interest in the property beyond maintaining the payments in the event the other person defaults. This type of agreement is typically used when an applicant is almost strong enough to qualify on their own but their application just needs a little boost. Or if the guarantor wants to avoid property ownership for tax or estate planning reasons. It is used on a case-by-case basis with lenders, most of which prefer a traditional co-signer over a guarantor.
Just like a guarantor, you make a legally binding promise to the bank that you will make the mortgage payments if the other person can’t. You go through the same application process that the homebuyer did to prove your creditworthiness and financial situation. In this case, you will sign the mortgage loan documents and your name will likely be listed on the property title. But depending on the situation, you may or may not co-own the property or have any claim to the homebuyer’s other assets. This type of mortgage co-signer is common among family members like parents helping children, or vice versa, as well as friends or business partners buying property together, such as a real estate investment or income property.
This type of arrangement is the most common among couples or common-law partners looking to purchase a home together. Co-borrowers typically share the financial responsibilities and ownership of the property equally. Both must submit to a full mortgage application which includes credit checks, income verifications, and asset/liability disclosures. Both applicants sign the mortgage loan documents, are both listed on the title, and are both considered owners of the property. They share the expenses of homeownership and are both equally responsible for making the monthly mortgage payments.
Are you qualified to co-sign a mortgage?
Generally, a co-signer should have a better credit score and a stronger financial situation than the primary borrower. If you have been asked to co-sign a mortgage in order to help the homebuyer qualify, you must prove to the lender you are creditworthy and financially capable of making the mortgage payment. Therefore, you are subject to the lender's mortgage qualification requirements. In order to qualify as a co-signer on a mortgage, you must submit to a credit check and provide the lender with the necessary documentation required to verify your income and debt obligations. Generally, a strong co-signer will have:
- good credit score no lower than 660
- Stable employment and enough income to cover your own debts plus the new mortgage payment
- Minimal debt, typically no other large debt obligations beyond your own mortgage (if you have one)
Risks to consider before you co-sign a mortgage
When you co-sign a mortgage, you enter into a legally binding contract. That kind of commitment should be taken seriously. It could also have other implications you haven’t considered. Besides the impact to your credit score, you should also consider:
Your own financial wellbeing
In the event the primary borrower cannot keep up with the payments, the lender is going to come looking for you. Are you able to handle a mortgage payment on top of your own financial obligations? Would taking on this extra payment each month, indefinitely, prevent you from making your own mortgage payment, car payment, or other loan payments? Would it cause you financial hardship? If the answer is yes, or even a maybe, then you should not co-sign a mortgage.
A joint chequing account
You might not necessarily know a mortgage payment was missed until after the fact when you get a call from the lender. Missed payments can have a catastrophic impact on your credit score, not to mention a hefty hit to your budget. You may want to consider opening a joint account with the primary borrower dedicated solely to the mortgage payment. That way you can keep an eye on the balance to avoid missed payments before they happen. If the primary borrower experiences financial hardship, you’ll have enough warning to make a plan before the worst-case scenario happens.
Taxes and estate planning
Depending on the situation, you may also be considered a part-owner of the property when you co-sign a mortgage. If that’s the case, the house would be considered one of your assets which could have tax and estate planning implications. You may want to pursue legal advice to minimize any taxes you may be liable for in the future, such as capital gains tax if the property appreciates in value. Depending on the ownership agreement, your share of the property may automatically transfer to a beneficiary or next of kin if either of you passes away. Consider the impact this could have on you, your family, and your estate.
Insurance: life, disability, and critical illness
Would you be able to manage the mortgage payment if the primary borrower were to pass away? What if they were seriously hurt, or too ill to work? Before you co-sign a mortgage, consider having a conversation with the primary borrower about life insurance, as well as disability and critical illness insurance to further protect yourself from financial hardship. You may also want to consider increasing insurance coverage for yourself to protect your loved ones and your estate from the impact of an outstanding loan obligation should something happen to you.
Access to credit in the future
The average length of a mortgage in Canada is 25 years. That’s a long time to be committed to someone else’s mortgage loan. It’s not very easy to get out of being a co-signer once you are one. In most cases, the primary borrower needs to apply for the mortgage all over again, on their own. They must prove to the lender they are creditworthy and financially capable of carrying the mortgage themselves. A mortgage loan reports on your credit file which affects your debt-to-income ratio. That could prevent you from accessing credit in the future. And as always, any missed mortgage payments will also show up on your credit report and seriously damage your credit score.
Should you co-sign a mortgage?
Whether or not you choose to co-sign a mortgage depends on your own financial situation, comfort level, and relationship with the homebuyer. However, there are a few situations when you should definitely say no to co-signing a mortgage, such as:
- If you feel uncomfortable or have any doubts about the other person’s ability to make the mortgage payment each month. Always trust your gut.
- If your credit score is less than 660 you may not qualify to be a co-signer but your credit score will take a hit from the hard credit check.
- If you cannot afford the mortgage payment in your current budget. Should the other person default on the payment, and you can’t make the payment either, the consequences will be disastrous.
- If you need to access credit in the near future. A mortgage loan changes your debt-to-income ratio which could prevent you from accessing credit in the future.