How (and When) to Co-Sign a Mortgage

If a buyer is worried that their income or credit score might make it hard to qualify for a mortgage, they might consider getting a mortgage co-signer.

A co-signer takes on the same responsibilities as the primary mortgage borrower, even though they may not live in the home. Although it may help you or someone you care about to get approved, know that there are both risks and benefits involved when putting your name on any mortgage contract.

» MORE: How does a mortgage work in Canada?

What it means to co-sign a mortgage

A co-signer pledges to take on the monthly mortgage payments if the primary borrower fails to pay. In essence, a co-signer becomes a co-borrower with all the same responsibilities as the homeowner; the co-signer’s name will even appear on the property title. Because a co-signer guarantees that a mortgage will be paid off, the co-signer’s credit score, credit history and income can be used to bolster an otherwise weak applicant’s mortgage application.

In general, a co-signer is needed when a person looking to secure a mortgage can’t qualify because of issues like a bad credit score, insufficient income or a limited credit history. A new immigrant or young person who recently entered the job market and hasn’t yet had a chance to build up a credit history may have trouble getting a mortgage without a co-signer, for example.

» MORE: What’s the minimum credit score for a mortgage?

Who can co-sign a mortgage?

Technically anyone is eligible to be a co-signer, but to be approved by the mortgage lender a co-signer must be financially fit. Co-signers are expected to have a good income and credit score, which will demonstrate to the lender that they can take on the monthly payments should the primary applicant default. Because co-signing is such a huge responsibility, it’s usually only undertaken by close friends or family members. For example, parents might co-sign a mortgage for an adult child’s first home.

» MORE: What is a subprime mortgage?

Should you be a co-signer?

Because a co-signer is legally responsible for payments in the event of a default, it’s vital to be certain that you fully understand and are capable of taking on this obligation. You may be responsible for payments until the mortgage ends, which could be a massive financial burden. Being a co-signer could also negatively affect your credit in the event the primary borrower frequently makes late payments. Furthermore, your ability to borrow in the future may be reduced since the mortgage is factored into your debt service ratios, and potential lenders may think you’re overextended.

» MORE: What happens if you break your mortgage contract?

Types of mortgages that can have a co-signer

Most types of mortgages can have a co-signer. It’s really up to your mortgage provider as to whether it will approve a co-signer.

Mortgage co-signer vs. mortgage guarantor

The responsibilities of a co-signer and a guarantor are similar, but not exactly the same. Both are third parties that use their financial health to help bolster a potential borrower’s mortgage application. Additionally, both are legally responsible for mortgage payments should the primary borrower default on their payments. Note also that being a guarantor for a mortgage could affect your credit score if the lender reports your status as a guarantor to one of Canada’s credit bureaus.

Despite these similarities, there are two significant differences between a co-signer and a guarantor. First, a co-signer’s name appears on the property title, while a guarantor’s name does not. Secondly, a co-signer must sign the mortgage agreement along with the primary applicant; guarantors don’t have to sign the mortgage agreement. As such, guarantors have no rights of ownership, even though they have all the same payment responsibilities as co-signers.

Generally, a co-signer is used for mortgage applicants who are likely to be refused otherwise, whereas a guarantor is intended for stronger applicants who just need a bit of backup.

» MORE: How much mortgage can I afford?

Pros and cons of co-signing a mortgage

Pros

• Easier for potentially unqualified mortgage applicants to secure a mortgage.
• Peace of mind for new homeowners, since they know their co-signer will have to help pay the mortgage if they come up short.

Cons

• Huge financial burden to the co-signer if the primary borrower defaults, which could ruin their credit as well as the relationship.
• May affect a co-signer’s future borrowing power.

Can a co-signer be removed?

If the primary mortgage applicant is managing the mortgage responsibly and reliably making all payments, they can ask the lender to remove the co-signer from the agreement. Some lenders may charge a fee to update the mortgage documents in this way. Borrowers should also confirm with that removing the co-signer does not count as breaking the mortgage agreement, which could incur huge penalties.

Alternatives to co-signing a mortgage

Though being a co-signer can be fulfilling because you’re helping a close friend or family member buy a new home, it could be a large and stressful financial risk. Some alternatives worth considering:

• Give funds to the potential home buyer directly. If you are in the financial 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.
• Get a joint mortgage. A joint mortgage, popular with married couples or parents helping their children buy a first home, gives both parties equal responsibility to make payments, and in return all parties get equal ownership of the home, as well as a right of survivorship.
• Encourage the buyer to seek government assistance. Rather than getting a co-signer, buyers can apply for one of the federal government’s programs designed to make it easier for first-time home buyers to afford a house. For example, the First-Time Home Buyer Incentive gives buyers up to 10% of a home’s purchase price to use toward a down payment.

DIVE EVEN DEEPER

12 Essential Tips for First-Time Home Buyers

Buying a new home is equal parts exciting and daunting. After all, it’s probably going to be the largest purchase of your life and since it’s where you plan on living, it needs to fit your lifestyle. There are plenty of steps to buying a house in Canada and it might feel hard to know […]

Hannah Logan

How to Save for a Down Payment

Buying a home in Canada can be tricky since prices have risen quite a bit. That said, with a lot of discipline and a good down payment, becoming a homeowner is possible. Knowing how to save for a down payment can make homeownership a reality since it’s not as simple as putting money aside each […]

Barry Choi

The Mortgage Stress Test: How to Calculate Your Qualifying Rate

In most cases, you’ll need to pass a mortgage stress test if you want to buy a home in Canada. It’s based on simple math, but the stress test can complicate things for home buyers by limiting the size of the mortgage they can qualify for. If you’re getting ready to buy a home, refinance […]

Clay Jarvis

Mortgage Default Insurance vs. Mortgage Protection Insurance

If you ask someone, “What is mortgage insurance?” you might get more than one answer. That’s because there are different kinds of mortgage insurance. The two primary types are mortgage default insurance and mortgage protection insurance. The former protects lenders, while the latter protects borrowers.  Let’s find out what’s unique about each kind of mortgage […]

Clay JarvisAaron Broverman