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Co-signing a mortgage involves a third party agreeing to make mortgage payments if the buyer cannot. If a hopeful home buyer’s income or credit score aren’t sufficient to qualify for a home loan, for example, they might consider finding a trusted friend or family member to act as a mortgage co-signer.
A co-signer assures lenders that their money will be repaid, decreasing risk and possibly convincing lenders to work with borrowers they might otherwise have denied funding to.
Looking at both sides of the equation can help you understand the full implications of asking someone to be your co-signer or agreeing to be a co-signer yourself.
» MORE: How does a mortgage work in Canada?
If you need a mortgage co-signer
Qualifying for a mortgage in Canada isn’t easy. That’s partially why co-signing a mortgage exists: It keeps the dream of home ownership alive for people who find themselves squeezed out of the housing market by high interest rates or tight lending standards.
Reasons you might need a co-signer
The reasons for needing a mortgage co-signer are closely related to why you might not get approved for a mortgage:
- You have a short, or non-existent credit history. Lenders will be wary of lending you a large sum of money if you don’t have much experience paying back creditors — specifically Canadian creditors, if you’re a newcomer to the country.
- Your credit score is too low. A low credit score can signal to lenders that you haven’t developed strong debt-repayment habits yet.
- There are questions about your income. If you’re not earning enough, or are self-employed and have difficulty proving you generate a stable income, a lender may not offer the level of funding you need to complete a home purchase.
Just because you fall into one of these categories doesn’t mean you should rush out and get a co-signer.
If your credit is damaged because of overspending or unpaid bills, for example, getting a co-signer could be highly risky for both of you. You’ll be taking out a loan you may not pay off, which could trash your finances, and your co-signer could see their income and savings devoted to paying off someone else’s mortgage..
You should really only consider bringing on a co-signer if you’re confident in your ability to pay off the mortgage on your own.
Who can be a co-signer?
Technically, anyone can agree to be a co-signer. Because co-signing is a huge responsibility, it’s usually only undertaken by close friends or family members, particularly parents, who may be more emotionally equipped to take on their child’s mortgage payments.
To be approved by a mortgage lender, your co-signer must be financially fit. Co-signers are expected to have a solid income and strong credit score, which demonstrate to the lender that they can take on the monthly payments should you default.
» MORE: What’s the minimum credit score for a mortgage?
How long does a co-signer stay on your mortgage?
Unless you take specific action to remove a co-signer from your mortgage, they will remain responsible for any unpaid mortgage payments until your mortgage is completely paid off.
Removing a co-signer from your mortgage
Once you’ve owned your home for a while and are managing your loan responsibly, you can ask the lender to remove the co-signer from your mortgage agreement. Doing so means taking on all the responsibility for making your mortgage payments, but it also frees your co-signer from facing any risks. Your lender must determine whether you can afford your mortgage payments before removing your co-signer.
Some lenders may charge a fee to update the mortgage documents in this way, so be sure you understand your lender’s terms and conditions before bringing on a co-signer. You should also confirm that removing a co-signer does not count as breaking your mortgage contract, which could trigger substantial penalties.
Mortgage co-signer vs. mortgage guarantor
If you’re having trouble getting a mortgage approved, but are close to qualifying, you may not need a mortgage co-signer. You might require a mortgage guarantor instead.
The responsibilities of co-signers and guarantors are similar, but there are a few significant differences that need to be understood.
| Mortgage co-signer | Mortgage guarantor | |
|---|---|---|
Helps a borrower qualify for a mortgage | Yes | Yes |
| Responsible for missed mortgage payments | Yes | Yes |
| Signs the mortgage agreement along with primary borrower | Yes | No |
| Name appears on the property title | Yes | No |
| Assumes partial ownership of the property | Yes | No |
If you’re asked to co-sign a mortgage
Co-signing a mortgage for a friend or family member is a big deal. As a co-signer, you pledge to take on the monthly mortgage payments if the primary borrower fails to pay. In essence, you become a co-borrower with all the same responsibilities as the homeowner. Your name will even appear on the property title.
Because you’re guaranteeing that a mortgage will be paid off, your credit score, credit history and income will be used to bolster an otherwise weak applicant’s mortgage application.
Taking on a major expense
The primary risk of being a mortgage co-signer is that you may have to take on the immense financial burden of paying off someone else’s mortgage.
During the qualification process, your ability to make these payments will be tested, so the payments themselves may not derail your day-to-day finances. But the money used to pay off this new mortgage will come at the expense of your other savings goals, like retirement, a new car or even additional property for yourself.
And if you have to assume payments early in the mortgage term, you could be on the hook for years. Getting around this obligation might require asking the buyer to sell the home before the end of the term, which could trigger a backbreaking prepayment penalty.
Limited credit
Being a co-signer could also negatively affect your credit if the primary borrower frequently makes late mortgage payments.
Your ability to borrow in the future may also be reduced. The mortgage you’ve co-signed gets factored into your debt service ratios, so potential lenders may think you’re overextended if you try to access credit while acting as a co-signer.
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The pros and cons of co-signing a mortgage
Pros:
- Helping a loved one buy a home. Being a co-signer can help otherwise unqualified mortgage applicants secure a mortgage.
- Peace of mind for new homeowners. Knowing a co-signer will help pay the mortgage if the buyer comes up short can take some of the stress out of being the owner of an expensive home.
Cons
- Assuming a potentially heavy financial burden. If the primary borrower defaults, it could ruin the co-signer’s credit — as well as the relationship.
- Decreased borrowing power. While the co-signing relationship is in effect, the co-signer may have access to less credit. This can mean putting major purchases on hold for years.
Alternatives to co-signing a mortgage
Though being a co-signer and helping a friend or family member buy a home can be fulfilling, it could also be a stressful, financially risky endeavour. Some alternatives worth considering include:
- Giving money to the buyer instead. If you are in a position to do so, you could give or lend the buyer enough for a substantial down payment, which would help them qualify for a mortgage without the need for a co-signer.
- Getting a joint mortgage. Joint mortgages are popular with married couples or parents helping their children buy a first home. They give both parties equal responsibility to make payments. In return, all parties get equal ownership of the home, as well as a right of survivorship.
- Encouraging the buyer to use assistance programs. Rather than getting a co-signer, buyers can use federal initiatives designed to make it easier for first-time home buyers to afford a house. The Home Buyers’ Plan and the First Home Savings Account could both be difference-makers.
Frequently asked questions about co-signing a mortgage
It’s difficult to precisely say what credit score a mortgage co-signer needs to help an applicant get approved. A credit score of 660 is generally considered “good” in Canada, and should help with the approval process. Co-signers still need to show strong income and manageable debt service ratios.
Co-signing a mortgage really only makes sense if you believe the mortgage applicant will keep up with their payments. Otherwise, you could both be in for some long-term financial pain. Co-signing can also hamper your ability to get approved for other credit, which could get in the way of any major purchases you plan on making.
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