If you’re having trouble getting a mortgage in Canada, you do have options. One of the most popular is to have someone co-sign for the loan with you. Basically, this means that while you are still responsible for making payments on the home and you’re still the owner of the home, the co-signer becomes responsible for making payments if you don’t meet your commitment.
Obviously, this is a big responsibility for someone to take on. They need to fully trust that you’re going to make on-time payments, and they need to be willing to step up if, for some reason, you come up against hard times.
If you’re thinking about getting a co-signer or co-signing for someone else, it’s important to understand the requirements and your responsibilities.
When Do You Need a Co-Signer?
As mentioned, a co-signer is an option when you're having some sort of issue qualifying for a mortgage on your own. It could be credit-related, income-related or simply an effect of timing.
Basically, if you are missing something in your mortgage application, your co-signer will fill that void.
No Specific Relationship Requirements
Now, it’s important to note that for the most part, there are no rules about who can be a co-signer. The co-signer does not have to be a relative. In theory, your co-signer could be your best friend, your neighbour, or your fifth-grade teacher!
Realistically, though, parents, siblings, or other close relatives are the people most likely to be willing to co-sign. Co-signing a mortgage can be a risk, and no one wants to take that risk for a casual acquaintance.
One thing to note: if your choice for a co-signer is someone who would benefit financially from the loan going through, they can NOT be your co-signer.
Qualifying for the Mortgage
The co-signer must be able to qualify for the mortgage on their own. This means they’ll have to have excellent credit and a high enough income to be able to comfortably make payments on their own.
If the co-signer is currently paying a mortgage already, then the bank will factor those monthly payments into their debt ratio. Additionally, the co-signer is usually one person, which can mean that only that person’s income is taken into consideration.
So while technically, anyone can be a co-signer, the truth is that it can be hard to qualify as a co-signer. This is another reason why many people turn to their parents for co-signing. Parents are more likely to have fully paid off their own homes, so they don’t need to factor that monthly payment into the calculations.
Note: There can be more than one co-signer (not just one): You can have up to 4 names on one mortgage. This might be helpful if you are not sure one person can shoulder the responsibility or to raise the combined income to qualify (all combined incomes (applicants and co-signers) can be taken into consideration to qualify).
Co-Signers and Mortgage Insurance
When home buyers have less than 20 percent for the down payment, they are required to have mortgage insurance. This is a small cost added onto the monthly payment that ensures the bank against defaults on the mortgage.
This is important because in 2014, CMHC instituted restrictions on mortgage insurance. Now, a person can only have mortgage insurance on one property. If the co-signer you're considering has mortgage insurance (not homeowners’ insurance) on their own home, they won’t be able to qualify to co-sign for another mortgage that requires it.
In this case, you have two options: have a large enough down payment so you don't need mortgage insurance or find a different co-signer.
Note: If co-signer already has a CMHC insured mortgage, there are options to go with other 2 insurers (Genworth & CGI).
Co-Signer Isn't Just a Name
When you co-sign a mortgage, you’re agreeing to be responsible for the mortgage. Sometimes, people agree to co-sign thinking they’re just helping out a child or a friend in signature only. They trust that the person is going to make the payments on the mortgage as agreed.
And of course, that's the plan!
However, the co-signer goes on title of the home as well as the mortgage and does have to step up if it doesn't go according to plan. Before agreeing to co-sign on a mortgage, the person should carefully consider what might happen if they are required to make payments.
Co-Signer Officially Takes on the Debt Load
Additionally, it’s important to note that the mortgage debt appears on the co-signers credit report as well, even if the primary borrower is fully responsible for making payments.
This additional debt can decrease the co-signer’s credit score. If that co-signer applies for additional credit, the lender will factor payments for the co-signed mortgage into the equation. In other words, if the borrower is paying $1,500 a month for the mortgage, that $1,500 will be factored into “monthly debt” for the co-signer despite not actually paying that amount each month. This makes it harder for the co-signer to qualify for additional credit.
It Doesn't Have to Be 50/50
Every situation is different. If you have great credit but you're just under the mark, your cosigner would only need to add an extra 5 - 10% to help you qualify. To the bank, there is no difference between you as the primary applicant and the co-signer. The bank will treat you both the same.
Getting someone to co-sign your mortgage can be a good solution when you’re having issues on your own; just make sure you and the co-signer understand everything that's involved.