Mortgage co-signer

Although mortgage lenders prefer homebuyers with pristine credit ratings, you can still get a mortgage if your credit rating is less than perfect. A mortgage is very large sum of money, so lenders want to ensure you’ll be able to pay it back before approving your loan.

A co-signer provides that assurance by guaranteeing repayment of the loan should the borrower be unable to repay the loan in full. Whether your credit score or debt service ratios are too low, a co-signer is fully responsible for the loan if you default on your mortgage. Rather than just having one source of income and assets, a co-signer means a lender has a backup source of funds should the borrower fail to repay.

Co-Signer vs. Guarantor

The terms co-signer and guarantor are often used interchangeably. Although they’re similar, there are distinct differences. A co-signer and guarantor both fill the same basic role – they act as a second source of funds should the primary borrower default on repayment. If your income is insufficient or your credit score it too low, a co-signer or guarantor can help you obtain a mortgage. The key difference is while a co-signer’s name appears on the property title, a guarantor’s does not and therefore does not have any legal right to the property.

Who can act as a co-signer?

Similar to the beneficiary on your life insurance policy, a co-signer can be almost anyone willing to vouch for you financially. Being a co-signer is a big responsibility, since you could find yourself on the hook for a second mortgage, so finding someone to take on this role isn’t always easy. If you’re purchasing a home with your spouse, he or she can act as the co-signer. If you don’t have a spouse, a parent, grandparent, aunt, until, sister or even brother can be your co-signer. The only criteria are for the co-signer to have a decent credit score and steady income.

Advantages and Disadvantage of a Co-Signer

Before you ask someone to be your co-signer, it’s important to be aware of the advantages and disadvantages.

Advantages

The borrower is able to obtain a mortgage that he or she would normally not qualify for

It will be in the interest of the co-signer to lend you a helping hand with your finances to ensure you have a budget and improve your credit score going forward

A co-signer acts as a safety net if you run into financial trouble and are unable to meet your regular mortgage payments

Disadvantages

A co-signer has his or her name of the property and therefore has equal say in decisions made regarding the property

If you’re unable to repay your loan, it can cause animosity with the co-signer who will be responsible for repaying the mortgage in full

It can be difficult to remove a co-signer’s name from the title of your property

A co-signer loses his or her status a first-time homebuyer and all the rebates and tax credits that come with it

How do I apply with a co-signer?

Applying with a co-signer is similar a regular mortgage application. The co-signer will need to provide all the normal documents you’d include when applying for a mortgage – tax returns, notice of assessment, T4 slips, etc. A credit report will also be requested for the co-signer. Once the loan has closed, a co-signer can be removed from title, provided your income or credit score has improved, freeing him or her from any financial responsibility.