Tighter mortgage rules intended to cool off hot real estate markets like Toronto and Vancouver are impacting Fort McMurray home buyers too. For example, the mortgage stress makes it harder to qualify for a home loan even though you have good credit and a good income. One solution is getting a co-signer. This can help if your debt service ratio is too high or your credit isn’t good enough to get a good interest rate. However, there are both risks and benefits to co-signing. We’ll outline both before sharing tips on mitigating the risks to co-signers and co-signees.
The Benefits of a Co-Signer
The biggest benefit of having a co-signer on a mortgage is that it may be what is necessary to secure a mortgage. A co-signer on the mortgage may be enough to get you a good interest rate instead of having to take out a high-interest loan. In this case, a co-signer will save you money in interest every month.
A co-signer backing the loan could protect the investment you make in your house. For example, they’re legally obligated to make the payments if you cannot. If they make the payments you’d otherwise miss, this might be enough to prevent foreclosure.
The Risks of Having a Co-Signer
If your co-signer is a co-borrower, their poor credit choices will hurt your credit.
If the co-signer has an equity stake in your home, their equity stake is part of their estate when they die and their assets if sued. This is why many want to have a guarantor of the loan instead of a co-buyer.
If the co-signer doesn’t make the payments when you can’t pay them, you’ll lose your home. This is why you have to choose a co-signer you can trust and rely on to pay the payments.
How to Mitigate Your Risks When Seeking a Co-Signer
Choose a co-signer for your Fort McMurray mortgage who is financially stable. Only select a co-signer who could pay both your house payment and theirs if need be. Extend your list of prospects when seeking a co-signer. It doesn’t have to be your parents. It could be your spouse, your siblings or your adult children. Their financial stability and creditworthiness are more important than others’ expectations.
Discuss expectations and obligations upfront, before you ask them to co-sign the loan. After all, lenders will vet the co-signers’ finances as thoroughly as they will yours as a borrower. Don’t ask someone to co-sign a loan that may be rejected. Understand their financial situation before you ask them to co-sign, since someone who is living off CPP and OAS may not qualify as a co-signer.
Work with a Fort McMurray mortgage broker to find a lender who will allow the co-signer to simply be a guarantor of the mortgage, not a co-borrower. This allows you to leverage their good credit and income without impacting your taxes or estate plan.
Consider setting up a large emergency fund so that you can pay the house payments if you lose your job. This protects your credit as well as that of the co-signer.
Talk to an accountant before you have someone co-sign the loan. After all, a co-signer who is listed on the title alongside you could prevent you from qualifying for various first time home buyer incentives.
How to Mitigate Your Risks as a Co-Signer
Require the Fort McMurray home buyer to sign up for life insurance and disability insurance. Disability insurance will cover their living expenses, including the house payment if they are unable to work. Life insurance will ensure that the surviving family will be able to pay off the mortgage if the borrower dies.
Set clear expectations about the financial relationship. How long will you be required to pay the house payment if the homeowner loses their job or can’t make the payments? When will they be obligated to sell the house? Or is the borrower expecting you to tap your home equity to save their house? Suppose someone requires a co-signer due to bad credit through no fault of their own, such as when they went through a nasty divorce. When will the home buyer refinance the mortgage to take you off the loan?
Talk to your attorney and accountant before you co-sign for the loan. For example, a co-borrower’s equity stake in the house complicates estate planning, while the loan that you’re equally liable for may have to be paid for out of your estate.
There is no moral or legal obligation to be a co-signer. Don’t sign paperwork you don’t understand or haven’t read because someone is pressuring you to do so. Always read the paperwork and seek legal advice as necessary.
Consider your financial plans before you co-sign. Don’t co-sign if it prevents you from retiring, buying a house or making other choices in the future.