It’s not uncommon for primary borrowers to require a cosigner to purchase their desired property. If you have recently bought a home and are trying to qualify for a mortgage, you may require a cosigner.
Whether you are a borrower considering a cosigner or you are a cosigner considering helping a borrower, here’s what you need to know.
There are a few different reasons cosigners exist which include the inability for borrowers to pass the mortgage stress-test that makes qualifying harder and skyrocketing property prices in Canada’s major cities that most of the younger generation can’t afford. There are other, more personal and specific issues such as having bad credit, limited credit history, employment criteria and so on. The most likely individuals to require a cosigner are between the ages of 20 and 34.
Cosigners may strengthen a mortgage application because they may have a stronger credit report, more assets and “qualifiable” income that can service the loan. For example, adding a cosigner’s yearly gross income to the mortgage application may help borrowers qualify for a greater purchase price in the event they don’t earn enough to qualify on their own.
A cosigner is responsible for the loan if the primary borrower defaults which is why they must have:
Many first time home buyers can become hesitant at the thought of their parents being responsible for their debt or loan payments in the event they default on their mortgage. They may not want to compromise autonomy over their personal finances by involving their parents. It’s perfectly normal to postulate about what a cosigner can mean but fortunately, cosigners are not only popular but often necessary for the short-term.
When borrowers think "co-signers”, they think “forever.”
For many people who have built real estate portfolios - meaning they own multiple properties- they’ve had to adopt various strategies to accomplish their goals.
Many times, the strategies don’t appear favourable at the onset, but get managed successfully and turn into a rewarding and lucrative investment. For example, someone with bruised credit may have to borrow from an alternative lender temporarily until they pay off outstanding loans and their credit score increases. Even though they’ve borrowed at a higher interest rate and are not saving as much interest as they could, they are still enjoying property ownership, and paying into their own asset.
Similarly, cosigners are not permanent. A cosigner can be removed from the mortgage contract at any point at which the main applicant can service the mortgage requirements independently.
For example, first time home buyers may go on to earn a larger salary within a year or two years from their purchase date and can apply with their financial institution to have their cosigner discharged from the loan obligation. In this way, the borrower still gets to purchase his or her first home, paying into a mortgage instead of renting and also gets to build equity.
In most cases, the mortgage term need not get broken to remove the cosigner from the liability. The lender will simply complete an internal application and make the changes, provided the borrower qualifies.
Cosigners On Title
There are essentially two different ways cosigners can interject to help with property ownership.
In the first way, a cosigner can remain off of title, meaning they do not get registered as an owner of the property through the Land Titles System. They merely guarantee the loan in case of default.
In the second way, the cosigner will be a partial owner of the property and will get registered on title together with the borrower. Some mortgage lenders require that cosigners be on title, therefore, the amount of ownership and the capacity of ownership itself (i.e. Joint Tenants or Tenants In Common) should be discussed with a real estate lawyer.
For example, a cosigner may have a 1% interest in the property as a “Tenant in Common” while the main borrower keeps a 99% interest.
The Dangers of Cosigning For Family
If you're considering cosigning a mortgage loan or you want to know more about the risks, it’s important to know that you will be responsible for the debt should the borrower default. Also, adding more liability to your credit profile can impact your credit score and limit you financially if you require other loans in the future.
Benefits of Cosigning
There’s little argument about prosperity in real estate. Since real estate values are increasing exponentially, it’s still considered a sound investment. As a parent or family member who gets asked to cosign, consider that your help may assist your relative with a chance at home ownership. And as a parent, if you're cosigning, it may finally get your children out of the house and give them a place of their own.
Alternatives To Consigning
If you’re on the fence about cosigning, it may relieve you to learn there are other options, that include:
1. Down Payment Help
If cosigning is not for you, then you can help your family member by gifting a down payment or helping out with the closing costs that can include land transfer tax and lawyer fees. One of the most common reasons most people can’t get a mortgage is because they don’t have an adequate down payment.
2. Buy The Home Yourself.
Some parents decide it’s beneficial to purchase a home and rent it out to their adult children until they can qualify for a mortgage. Later, the children can buy the home back from the parents by taking out a mortgage and completing a transaction called a “transfer and refinance.”
If you want to learn how much mortgage you can qualify for, complete a mortgage pre-approval today. CLICK HERE to get started.
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By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929