What Are the Mortgage Co-Signer Requirements in Canada?
If you’re having trouble getting a mortgage in Canada, you do have options. One of the most popular is to have someone co-sign for the loan with you. Basically, this means that while you are still responsible for making payments on the home and you’re still the owner of the home, the co-signer becomes responsible for making payments if you don’t meet your commitment.
Obviously, this is a big responsibility for someone to take on. They need to fully trust that you’re going to make on-time payments, and they need to be willing to step up if, for some reason, you come up against hard times.
If you’re thinking about getting a co-signer or co-signing for someone else, it’s important to understand the requirements and your responsibilities.
When Do You Need a Co-Signer?
As mentioned, a co-signer is an option when you’re having some sort of issue qualifying for a mortgage on your own. It could be credit-related, income-related or simply an effect of timing.
Basically, if you are missing something in your mortgage application, your co-signer will fill that void.
No Specific Relationship Requirements
Now, it’s important to note that for the most part, there are no rules about who can be a co-signer. The co-signer does not have to be a relative. In theory, your co-signer could be your best friend, your neighbour, or your fifth-grade teacher!
Realistically, though, parents, siblings, or other close relatives are the people most likely to be willing to co-sign. Co-signing a mortgage can be a risk, and no one wants to take that risk for a casual acquaintance.
One thing to note: if your choice for a co-signer is someone who would benefit financially from the loan going through, they can NOT be your co-signer.
Qualifying for the Mortgage
The co-signer must be able to qualify for the mortgage on their own. This means they’ll have to have excellent credit and a high enough income to be able to comfortably make payments on their own.
If the co-signer is currently paying a mortgage already, then the bank will factor those monthly payments into their debt ratio. Additionally, the co-signer is usually one person, which can mean that only that person’s income is taken into consideration.
So while technically, anyone can be a co-signer, the truth is that it can be hard to qualify as a co-signer. This is another reason why many people turn to their parents for co-signing. Parents are more likely to have fully paid off their own homes, so they don’t need to factor that monthly payment into the calculations.
Note: There can be more than one co-signer (not just one): You can have up to 4 names on one mortgage. This might be helpful if you are not sure one person can shoulder the responsibility or to raise the combined income to qualify (all combined incomes (applicants and co-signers) can be taken into consideration to qualify).
Co-Signers and Mortgage Insurance
When home buyers have less than 20 percent for the down payment, they are required to have mortgage insurance. This is a small cost added onto the monthly payment that ensures the bank against defaults on the mortgage.
This is important because in 2014, CMHC instituted restrictions on mortgage insurance. Now, a person can only have mortgage insurance on one property. If the co-signer you’re considering has mortgage insurance (not homeowners’ insurance) on their own home, they won’t be able to qualify to co-sign for another mortgage that requires it.
In this case, you have two options: have a large enough down payment so you don’t need mortgage insurance or find a different co-signer.
Note: If co-signer already has a CMHC insured mortgage, there are options to go with other 2 insurers (Genworth & CGI).
Co-Signer Isn’t Just a Name
When you co-sign a mortgage, you’re agreeing to be responsible for the mortgage. Sometimes, people agree to co-sign thinking they’re just helping out a child or a friend in signature only. They trust that the person is going to make the payments on the mortgage as agreed.
And of course, that’s the plan!
However, the co-signer goes on title of the home as well as the mortgage and does have to step up if it doesn’t go according to plan. Before agreeing to co-sign on a mortgage, the person should carefully consider what might happen if they are required to make payments.
Co-Signer Officially Takes on the Debt Load
Additionally, it’s important to note that the mortgage debt appears on the co-signers credit report as well, even if the primary borrower is fully responsible for making payments.
This additional debt can decrease the co-signer’s credit score. If that co-signer applies for additional credit, the lender will factor payments for the co-signed mortgage into the equation. In other words, if the borrower is paying $1,500 a month for the mortgage, that $1,500 will be factored into “monthly debt” for the co-signer despite not actually paying that amount each month. This makes it harder for the co-signer to qualify for additional credit.
It Doesn’t Have to Be 50/50
Every situation is different. If you have great credit but you’re just under the mark, your cosigner would only need to add an extra 5 – 10% to help you qualify. To the bank, there is no difference between you as the primary applicant and the co-signer. The bank will treat you both the same.
How To Apply for a Mortgage With a Co-Signer
Whether you need a co-signer because you have bad credit or you lack the proper financial history to enable you to qualify for a mortgage on your own, a mortgage co-signer can make the impossible possible. With the right co-signer, you can greatly increase the chances that you’ll qualify for approval, but it also means that if you’re unable to make payments on your own, your co-signer will have to pick up the slack.
That might help convince a lender that the loan you’re requesting is a good financial decision, as long as your co-signer has better credit and a better credit history than you do. And since anyone can be your co-signer, you can ask parents, siblings or other relatives — or even anyone over the age of 18 that can help supplement the income and credit history requirements. Sometimes, even a foreign national can be your co-signer; it all depends on the lender.
What Is a Mortgage Co-Signer?
As we already mentioned, a co-signer is anyone that will take on the responsibility of your mortgage should you not be able to pay. But according to mortgage co-signer requirements in Canada, mortgage insurance is only available to just one property per borrower, meaning that those who own their own homes may not be able to co-sign with you if they also have an existing mortgage.
A mortgage co-signer is also slightly different from a co-borrower, which means they retain ownership rights and appear on both the mortgage and title. Conversely, a co-signer lacks the ownership right, but will still appear on the mortgage and title. If you were buying a property with a partner, you’d be co-borrowers. But bringing somebody in to help you qualify for a mortgage is slightly different.
All of that is also different from a guarantor, which would be on the mortgage but not the title. Co-signers appear on both.
What if Something Happens To Your Co-Signer?
If your co-signer passes away, goes bankrupt or is otherwise unable to help from a financial standpoint, your mortgage won’t automatically be rescinded. But it also doesn’t mean that you’re out of the woods when it comes to repayment.
Depending on the terms of your mortgage, your lender may want to revisit the terms or shift the burden to your co-signer’s estate. Most mortgages have clauses to protect against these unforeseen changes, so it’s best to ask your lender to clarify what happens when something unexpected takes place.
Are There Any Co-Signer Benefits?
While some believe that a co-signer can get numerous tax breaks and other benefits from signing-on to a mortgage, that’s only if your co-signer helps out financially with your mortgage, such as helping to make mortgage payments or pitching in on the property tax. For the most part, co-signing doesn’t grant a co-signer any real benefits beyond helping a family member or friend afford their own home.
That said, co-signers are on the mortgage and the title, so there are some rights that are derived from co-signing. However, their rights stop shy of ownership — you own the property, not your co-signer.
Why Do People Become Co-Signers?
Due to the mortgage co-signer requirements in Canada, most co-signers choose to participate to help a family member or loved one qualify for their first home. Most of the time, this means that parents will co-sign on their child’s first home to help satisfy certain financial requirements — though as we mentioned earlier there are other options for co-signers that want to take on a bigger role in the sharing of a property.
If someone is interested in an ownership stake in the property, it can be beneficial to be a co-borrower instead of a co-signer. Co-borrowers retain ownership in addition to being placed on the mortgage and title, though, admittedly, it’s more like co-ownership than the largely hands-off nature of co-signing.
But if your co-signer isn’t looking for an ownership stake — or you don’t want to cut them in! — co-signing could be a good compromise. Co-signers are still responsible for paying the mortgage if you can’t, and that could be the best course of action for all involved.
Can Co-Signing Affect Your Credit Score?
Due to the fact that co-signers are responsible for the repayment of a mortgage even if they don’t live in or make payments on the property, the housing loan repayment history will affect the credit scores of both the main debtor and co-signer. However, if payments are made in full and on time, there should be no negative effect for either party. In fact, it should help both.
Protect Yourself With an Enforceable Contract
Sometimes the exact nature of a co-signer agreement isn’t sufficient for the parties involved. If that’s the case, mortgage co-signer requirements in Canada allow you to create an enforceable contract between the debtor and your co-signer. The contract should stipulate who pays what, who occupies the property and who maintains it, as well as what would happen in the event of a dispute or if one party wants out.
Getting someone to co-sign your mortgage can be a good solution when you’re having issues on your own; just make sure you and the co-signer understand everything that’s involved.