Nancy Blakely, BComm
Co-signing 101
4/25/2023
Mortgage Co-Signing 101
A mortgage co-signer is someone who agrees to share the responsibility for a mortgage in the event that the primary applicant is not able to make their mortgage payments.
Family members are the most common co-signer because there is a strong relationship and trust. This may be parents co-signing for their children, children co-signing for their retired parents, or siblings. There is no legal stipulation that a co-signer must be related to the applicant.
Positive Benefit
A co-signer may lend credence to the application to give the lender confidence that the applicant(s) can manage the debt. This may be the only way that the applicant can obtain a mortgage to buy a home or it may improve the applicants borrowing ratios and entitle the applicant to better terms in the mortgage such as a lower interest rate.
Negative Impact
The co-signer must recognize that their buyer power will be reduced by the amount of the mortgage and mortgage payment which will now be reflected on their credit as a debt.
Types of co-signers
Co-Borrower: The co-signer effectively purchases the home alongside the applicant. Their name is placed on title of the property and both parties are considered equally responsible for the debt in the event of default. Please speak to your lawyer about the registration of the mortgage as either Joint Tenants or Tenants-in-Common.
Registration of Co-Borrower: Co-signers are most commonly registered as Tenant-in-Common with 1% ownership of the property because this has the least tax implications at the time of sale of the property. Alternatively, the co-signer may elect or be requested by the lender to be registered as Joint Tenants. The difference is in estate planning. In the event of death of the co-borrower, the surviving Joint Tenant inherits the deceased share of the property whereas the deceased’s share is transferred to their estate with Tenant-in-Common. It is recommended that the co-signer explore tax and estate planning considerations with their lawyer and that they update their will.
Guarantor: A guarantor has all the responsibility of the co-signer but is not named on the asset as part owner. They remain responsible for servicing the loan if the loan goes into default, but the guarantor is not considered to be part owner of the property and does not have any legal connections to the property. There are a few lenders that permit a guarantor on an exception basis when the co-signer is at high risk of being sued and the property may be brought into the suit.
Why does an applicant need a Co-Signer?
Income: An applicant may benefit from a co-signer when their debt service ratios are too high to qualify for the mortgage amount requested. In other words, if it is deemed that the mortgage payment, property taxes, utility cost and other debt payments are higher than the lender permits, then they may be able to add a co-signer to the application to prop up their combined income net of all living expenses.
Credit: An application may benefit from a co-signer if a borrower’s credit score is low or history is “thin” which means that they do not have a lot of credit history. Lenders require a minimum of two credit items reporting to Equifax for two years with no missed payments or collection items for an applicant to be considered. If a borrower has less than this, they may be approved with a co-signer.
What qualities do lenders look for in a co-signer?
The lender will be looking to fill the gaps of a mortgage application whether it is because the applicant has thin credit or insufficient income or both.
Strong Income: The lender will want confirmed steady income to debt service the mortgage by way of salary income or two years average net income reported to CRA on their income tax. Lenders may consider exceptions to include self employed stated income or less than two years history if the borrower previously worked in the same field.
Good Credit History: Credit helps to determine a client’s financial character and maturity. Lenders require the co-signer has a history and reliable track record managing debt repayment with a minimum of at least two items reporting to Equifax for two years or more.
The Trust Factor
Trust is a key consideration for both parties. Both parties should consider the character and stability of the other. Financial disputes can destroy family unity and long-standing friendships. All parties should consider if they are able to fulfill their responsibility and how they will deal with a situation in the event of default. The co-signer must trust the applicant will make the mortgage payments and the original applicant must trust the co-signer to be named on their asset as an owner.
Independent Legal Advice: Both parties should seek independent legal advice from an experienced real estate lawyer. This is to ensure they fully understand their obligations, rights, and tax implications as it relates to the property.
Updated Will & Testament: All parties should update their will to address their intentions upon death and give their executor clear direction with respect to their share of the property ownership.
Reach out to a Mortgage Agent
If you’ve been declined for a mortgage based on income or credit history, don’t fret! A Mortgage Agent may explore the impact of a co-signer to prop up your application and fill in the gaps.
Please contact me if you have any questions. I am here to help!
To Learn More Contact
Nancy Blakely, Mortgage Agent
The Mortgage Advisors Lic11947
T: 905.269.3721
Apply Now at www.NancyBlakely.ca
