What Does it Mean to Co-Sign a Mortgage?

General Pam Pikkert 21 Jan

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
  • Paystubs
  • 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? 

  1. 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
  2. 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?
  3. Mortgages report on the credit bureaus so you could be adversely affected if there are late payments
  4. 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.

Now Is the Time to Get Pre-Approved

General Pam Pikkert 13 Jan

So 2016 was an exciting year in the mortgage world! The problem is that we mortgage professionals really hate it when things get exciting in our world. Between the economy and the federally mandated mortgage rule changes and their ensuing fallout, it is now more important than ever to get a solid pre-approval in place. I am not just speaking to first time home owners either! Before you list your current home or refinance your mortgage or consider buying a rental, you need to make sure that you qualify under the new mortgage rules.

The biggest change by far was the increase to the mortgage qualifying rate. Basically, no matter which term you are selecting you will have to qualify at the Bank of Canada posted rate which is currently 4.64%. The mortgage rate you are given will be considerably less than this and will be based on whichever term you choose. The rationale is that there is no way rates were going to stay at 2.39% and all of a sudden a lot of people could be hit with a significant mortgage payment increases which could mean increased foreclosures. When you remember that our federal government is actually financially backing those mortgages through the mortgage insurers, they had a vested interest in keeping the housing market secure.

So the things you need to know:

1. Rates have climbed since the rule changes were announced, so if a new home is in your future get a rate hold in place so you are protected against further increases. Most are good for 120 days.

2. Make sure they are checking your credit and not just seeing how much you are qualified for based on your income. Can you imagine selling your home only to be told that you do not qualify for the financing on the next because of something on your credit bureau? It has happened, I assure you.

3. Given the variety of ways in which we all get paid, you also need to make sure your pre-approval is solid given your situation. For example, the mortgage lenders require a 2 year history on all variable income. That means if your income is commission, bonuses, overtime or shift differential then you will need a 2 year history of it before it can be used for the mortgage qualification.

4. Porting is an area which is slightly misunderstood. You will have to qualify for the mortgage under the new rules even if you are just moving the mortgage from A to B. Please refer back to the previous horror story of the people who had sold and then could not buy a new home.

5. Ironically, the changes now mean that if you are refinancing your home, there is a possibility that you will have a higher mortgage rate than someone putting 5% down. This is because the 5% down mortgage is insured while yours with the significant amount of equity is not making it a higher risk for the bank. If you are considering a refi you may want to do it sooner rather than later given the rate increases.

6. Rental properties have been heavily hit by the changes. Our economy means that fewer lenders are willing to consider these mortgages to start with and those that still are have upped the ante. Some have increased the minimum down to 35% from 20%. Others require a very strong net worth in liquid assets. If you have multiple properties make sure they are reporting on your taxes.

So that’s about that. A solid pre-approval from a qualified mortgage professional is a very good peace of mind strategy for both the new home buyer and those veteran buyers. When you’re ready to talk of if you need more information, the mortgage professionals at Dominion Lending Centres are here!