Since 2016, increased regulations and mortgage rule changes have made co-signing or gifting down payment quite common and often necessary to help buyers get into the real estate market and buy their own home.
Lenders and mortgage default insurers have been active by putting some great “family plans/co-signing” products in place. These products make it easier and cheaper for co-signers to be removed once the main applicant can qualify on their own. Though extremely common and overall minimal risk if the borrower is able to make the mortgage payments, it is really important to be transparent and understand the risk for the person who is co-signing.
Things to know:
- The co-signer is agreeing to be a backup up and make payments should the borrower fail to perform.
- Missed or late payments will also negatively affect the credit record of the co-signer.
- If the mortgage that is co-signed goes into foreclosure, this will majorly impact the co-signer from getting future mortgage approval.
- The co-signer may also be liable in any legal actions, should they occur. His or her own property could be at risk in a lawsuit.
- The mortgage payment and the debt on the property will also be “owed” by the co-signer, thus increasing his or her debt load which may be a problem if needing or wanting to obtain credit later.
Co-signing is a generous gift, but if the borrower defaults or neglects on the mortgage, and/or the property responsibilities, then the co-signers credit or even more serious implications can be at risk. If you are co-signing, be sure to be in open communication and full trust with the borrower you are helping.
Co-signers are essentially co-borrowers, their income, credit and liabilities will be reviewed no differently than the borrower and will be reviewed under the current mortgage regulations and rules. Another thing to keep in mind is that a co-signer might not be able to co-sign if they don’t have enough verifiable income or already too much debt load to take on the loan.
In Canada, a co-signer who is not an immediate family member (parent, grand parent, sibling) is not typically considered, because there is too much risk associated with being a co- borrower who is not living in the home. In general, a co-signer must be considered an immediate family member.
Before you put an offer an a home, its really important to have all borrowers pre-approved. With Mortgage Sisters West, all our pre-approvals are completed with full documentation so we can be 99% certain there will be no hang ups in the process. Don’t risk your approval to chance, lets do this right and reduce the stress when you are purchasing a home.