What does it actually mean to co-sign for a mortgage?
There seems to be some confusion about what it actually means to co-sign on a mortgage and you know that where there is confusion, your trusted mortgage professional seeks to offer clarity. Let’s take a quick look at why you may be asked to co-sign and what you need to know before, during, and after the co-signing process.
So why are you being asked? Last year there were 2 sets of changes made to the mortgage world which can likely explain why you are receiving this request in the first place. The first occurred early in 2016 whereby the overall lending standards were increased in regards to an individual’s management of their credit and the resulting responsibility of Canada’s financial institutions to ensure they are lending prudently. We have seen an increase in requests for co-borrowers to help strengthen applications when credit or job stability is an issue. The second happened just in October. A new ‘stress test’ rate applies which has especially impacted borrowers with less than 20% down. They must qualify at a rate of 4.64% though their actual interest rate is much lower. This has decreased affordability for many which means they could be looking for a co-borrower to increase how much home they can qualify for.
If it was me, I would ask questions as to exactly why the applicant needs a co-borrower. If it is a credit issue then you need to assess if that an acceptable risk. If it is a matter of not enough income, you need to assess that instead. What is the exit strategy for you all from this joint mortgage?
What can you expect? You will be required to complete an application and have your credit pulled. As you are now a borrower the banks will ask you for all the documentation that the main applicant has already provided. This can include but will not be limited to:
- Letter of employment
- 2 years Notice of Assessments, Financial Statements and complete T1 Generals
- Mortgage statements on all properties you own
- Bank statements if helping with the down payment
- Property tax bills
- Lease agreements
- Divorce/separation agreement
So you get the idea. You are now a full applicant and will be asked for a whole bunch of paperwork. It is not just a matter of saying yes. Once the application is complete and all conditions have been met with the mortgage, you will have to meet with the lawyer as well.
What do you need to be aware of?
- This is now a monthly liability according to the world. You will have to disclose this debt on all your own applications going forward. It can affect your ability to borrow in the future
- Each lender is different in their policy as to how soon you can come off the mortgage. Familiarize yourself with this. Are you committing to this indefinitely or only for a couple of years?
- Mortgages report on the credit bureaus so you could be adversely affected if there are late payments
- If the main applicant cannot make the payment for whatever reason, you are saying that you will. Make sure your budget can handle that for a few months.
A few things you may want to consider if you do agree to co-sign.
- Ask for an annual statement to be sent to you as well on both the mortgage and the property taxes.
- Consider a joint account for mortgage payments so that you can check in every so often to ensure all payments are being made on time
- Talk about life insurance! If the worst occurs, then at least have enough of a policy in effect, with yourself as the beneficiary, to cover a year of mortgage, taxes and bills so that you are not hit with an unexpected series of expenses until the property sells.
So though you just want to help your loved one into their dream home, you are all better served if you know exactly what you are getting into and are prepared for the contingencies.