Qualifying for a mortgage is challenging, especially today, thanks to stricter lending guidelines and the Mortgage Stress Test. Therefore, it’s common for some borrowers to require a cosigner to sign a mortgage contract in order to help support their application.
Cosigners can help by adding additional income and employment history to help support the mortgage payments or better credit history if the primary borrower has bruised credit, for example.
Cosigners must be immediate family members like parents, grandparents or siblings and they must also meet lending guidelines such as the requirement to have good credit. Cosigners should also have assets of their own preferably real estate since they are adding more strength to the application.
Although cosigners want to help the primary mortgage applicant, they often wonder how cosigning works and how it affects their long and short term financial goals. Potential cosigners may also wonder whether they have to go on title or if they can stay off title.
It's important to understand that a cosigner is vouching to take on a big responsibility, which is the mortgage payments should the primary borrower find themselves in a position where they can no longer make them. Again, this is an enormous responsibility, so both the primary borrower and potential cosigner should assess the likelihood of default and what it means for both parties.
The potential cosigner should also keep this in mind if they are thinking of applying for additional loans or mortgages in the future, since the mortgage loan will appear as a liability on their credit report.
Does a cosigner have to go on title?
Once a cosigner has decided that they do want to help, they can choose to go on title as a co-borrower or remain off title as a guarantor.
If the cosigner becomes a co-borrower, then the amount of ownership gets allocated based on personal preferences (for example, the primary borrower keeps 99% ownership and co-borrower gets a 1% ownership and both become tenants in common).
One issue to keep in mind before a co-borrower signs a loan is selling or refinancing in the future. If the primary borrower refinances their mortgage or sells the property, the co-borrower becomes entitled to the percentage of ownership that was originally set out in the transfer/deed. The primary borrower will also require the permission of the co-borrower to refinance or sell, since it will require them to execute legal documents for any real estate transactions.
Guarantors work differently. If a cosigner acts as a guarantor, he or she simply vouches for the loan payments should the primary borrower default but does not keep any interest in title to the property and is therefore not an owner of the home. Primary borrowers do not require permission of the guarantor to sell or refinance or engage in real estate transactions pertaining to the subject property. Again, a guarantor has no interest in the title of the home.
Cosigners do not have to be a permanent fixture of a mortgage. If the primary borrower’s income situation changes or if their credit score improves, for example, and the cosigner is on title, they can apply to have the cosigner removed from his or her obligations. The bank would complete this process through a “Release of Covenant.”
Do you require more information about cosigners?
A Mortgage Broker can help walk you through the process. Please call or write today.
Sarah A. Colucci
Mortgage Agent, Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929