Owning a home or cottage can be just slightly out of reach for many people. Even when individuals feel they are financially ready, they may not qualify for a mortgage and get turned down by their bank. Luckily, this doesn’t necessarily mean that home-ownership is out of the picture for the foreseeable future. Many people opt to use a co-signer to qualify for their mortgage, but there can be risks involved. Here is some key information you need to know about mortgage co-signers.
What a co-signer does
A co-signer is someone who will be equally responsible for your mortgage loan and they agree to cover your mortgage payments if you are not able to. Co-signers must also fill out paperwork to show that they are in a strong financial position, which includes having an excellent credit rating. Quite simply, your co-signer is your Plan B – if you default on your mortgage payments, your co-signer is held responsible because their name is on the deed/title of the home along with yours.
Another option is a guarantor, who will declare to lenders that they feel you are fully capable of paying your mortgage, and they agree to pay your mortgage if, for any reason, you cannot. However, the guarantor’s name does not go on the deed/title of your home, which means that they have no financial stake in the property.
When a co-signer is needed
For many people, it’s not about having a low score on a credit rating, it’s about having zero credit rating. For people who may be new to the country, self-employed, or fresh out of college or university, getting approved for a mortgage can be difficult – as there is no evidence of your ability to pay loans or manage a heavy debt-load such as a mortgage. Even when people have a substantial down-payment, lenders may still deny the mortgage application. With low (or no) credit rating, it sometimes makes sense to bring in a mortgage co-signer.
Who to choose
In Canada, co-signers must demonstrate not only that they are financially able to cover your mortgage should you default on it, they also must show they have a relationship with you; it can’t just be a wealthy investor or your hairdresser. Since it is such a significant obligation, the people most often approved as co-signers are parents or other close family members. Although there are situations where close friends, distant relatives or co-workers may be approved, it isn’t necessarily advisable. Relationships are tricky enough to manage most days, but when you add in financial pressures and a large amount of money, things can ‘go south’ pretty quickly. It’s important to have a significant amount of trust, caring and support from whomever you ask to be a co-signer. Additionally, if you are ever asked to be a co-signer, you’ll want to weigh the odds carefully knowing there’s more at risk than your relationship.
Other considerations
Some individuals who are turned down for a mortgage from a bank, credit union, or certified mortgage broker may consider using a private lender. Although it may seem like a suitable alternative, the higher interest rates, additional fees and short mortgage terms may become too difficult to manage. As always, it’s important to investigate all available options. Getting (or becoming) a co-signer is an important personal, financial and legal matter that should be carefully managed.
If you have questions about mortgage co-signers or other real estate concerns, be sure to talk to our team at Ares Law. We specialize in providing legal services to clients in Bracebridge, Gravenhurst, Huntsville, Port Carling and surrounding areas in Muskoka. Connect with our team so we can help ensure you have a stress-free experience when you buy or sell your home or cottage. Give us a call today at 705-645-8743; we’re here for you.
