Should You Get a Co-Signer On Your Mortgage?
Are you looking for a way to afford your dream home, but you’re not quite able to qualify for the mortgage amount on your own? In this article, we’ll look at what co-signing a mortgage is, why you would need a co-signer, and how a co-signer is different from a guarantor, among other things.
What is Co-Signing a Mortgage?
When someone co-signs a mortgage for you, it means that they agree to make the mortgage payments if you’re not able to. The co-signer becomes your co-borrower, as you share the responsibility of the mortgage.
Co-signing a mortgage isn’t without its risks. As such, usually, co-signing only happen with family. For example, it’s pretty common for parents to co-sign for their adult children, adult children returning the favor, and co-signing for their parents who are retired and co-signing for a sister or brother.
Why Would You Need a Co-Signer
Perhaps the most common reason you might need a co-signer is to help boost your home purchasing power.
The mortgage stress test had made it tougher to qualify for mortgage financing. You have to prove that you can afford mortgage payments at the greater of 2 percent higher than your mortgage rate or the mortgage stress test rate, whichever is greater.
When someone, a parent, or sibling, co-signs for you, you can use their income for mortgage qualification purposes. (You also have to include their debts.) If your parents are still working, earn a decent income, and have little to no debt, they can be an excellent candidate for co-signing.
Co-signing also makes sense when you have poor credit or a lack of credit. In that instance, a lender may require you have to a co-signing before they approve the mortgage. This provides the lender with some reassurance the co-signer will pay the mortgage should you run into difficulty paying it.
How is it Different from Having a Guarantor?
The terms co-signer and guarantor are often used interchangeably. While both are similar, there are some key differences to be aware of.
The co-signers name must appear on the title, while the guarantor’s does not. Because the co-signer’s name has to appear on the title, the co-signer may have to pay a portion of the land transfer taxes, and you may lose part of the first-time home buyer rebate if you’re buying a home for the first time.
In addition to that the co-signer owns a part of the property. That’s not the case with a guarantor, who owns no part of the property.
Co-signers tend to be used for those with poor credit, while guarantors tend to be used for those with decent credit looking to bump up their maximum purchase price.
Things to Know About Co-Signing
Before you co-sign on a mortgage, make sure to understand what you’re signing up for and get legal advice from a Real Estate Lawyer.
Make sure it’s for someone you know and trust. If the co-signer misses payments or is late on payments, not only will you owe the payment, it could negatively affect your credit score.
Something else to be aware of is that being a co-signer affects how much you can borrow if you’re planning to buy a rental property or buy a more expensive primary residence; co-signing means that you may not qualify to spend as much as before you co-signed.
Once the primary applicant, the person you’re co-signing for, can qualify on your own, you may want to be removed as a co-signer.
Be aware that there may be fees to be removed as a co-signer. The only way to do it might be breaking the mortgage. Depending on the lender, the penalty could end up being quite costly.
If you want to be removed as co-signer and the person you’re co-signing for doesn’t yet qualify for a mortgage on their own, they may have no choice but to take out alternative financing at higher rates.
The Bottom Line
Are you thinking about asking mom or dad to be a co-signer on your mortgage, but you wanted a few more details about co-signing before doing so? Speak with to one of our experts ahead of time to help ensure the process goes smoothly.