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What to Know About Co-signing for a Mortgage in Canada

Written by Jessica Steer
Just like with personal loans, if someone is unable to qualify for a mortgage on their own, they’re able to get a co-signer. As a co-signer, you’re telling the lender that you will make any payments that the primary mortgage applicant is unable to afford.
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    This is because your income and credit history are taken into account, just like the person that you’re co-signing for.

    Before you agree to co-sign on a mortgage, it’s important to consider how co-signing will affect you. Even though you aren’t the primary borrower on the item being purchased, it still gets added to your credit report and will stay there until it’s paid off. 

    Requirements for Co-signing a Mortgage in Canada

    When it comes to co-signing a mortgage in Canada, you’ll be there until the duration of the mortgage is paid off unless you’re physically taken off of the mortgage. Because of this, lenders look for co-signers who have solid finances and good credit scores. This reduces the risk for them and gives them more assurance that they’ll get their funds back. 

    The specific factors lenders look for in a lender are:

    • A credit score of 660 or higher
    • Full-time employment
    • A low debt ratios
    • A high monthly income

    They have to be sure, in the event the borrower can’t pay the funds back, that the co-signer can afford to do so. Once this is proven, then the mortgage lender can get your mortgage approved. 

    Tax Implications of Co-signing

    When you co-sign a mortgage in Canada, you’re considered as part owner of the property. This means that as that property increases in value, you’re still seen as the owner. How does this affect your taxes? Well, you could have to pay capital gains when the property is sold since you’re considered to be a partial owner. 

    Types of Co-signing

    In Canada, there are two different types of mortgage co-signers. One is a guarantor, whereas the other is a co-signer. What’s the difference, though? Well, guarantors are co-signers who aren’t added to the title. They don’t actually make mortgage payments, but they are vouching for the borrower and agree to make the payments in the event that the actual borrower can’t make the payments. 

    Cosigners agree to make the payments with the other borrower and are included on the title of the property. This usually refers to a spouse or a parent who co-owns the property with you. Both of these are technically cosigners, though. That said, mortgage lenders tend to prefer co-borrowers over guarantors.  It can be slightly more challenging to get a loan with a guarantor, but that doesn’t mean it’s impossible. It’s important to note, though, that cosigners don’t have to be co-borrowers. If it’s a joint ownership, then they’re considered co-borrowers. If their name is on the title, but there isn’t joint ownership, then they’re considered to be a co-signer. They’re very similar, though. 

    Guarantor Vs Cosigner

    There is a significant difference when it comes to being a guarantor or a co-signer. For starters, co-signers have to make any missed payments right away if the primary borrower defaults on a payment. Guarantors don’t have to assume loan payments until the primary borrower fails to make payments and defaults on the mortgage so late payments will affect and lower credit scores. 

    Whether you are a co-signer or a guarantor, though, you’re taking the same risk. You’re putting your money and your credit on the line. The purchase will show on your credit report and reflect on your overall credit history, even though you’re not the primary borrower. 

    How Co-signing Affects Your Credit Score

    Co-signing a mortgage can affect your credit score in a number of ways, but before we get into that, the first thing that we should mention is that co-signing also affects your borrowing power. Even though you aren’t the primary borrower on the mortgage loan, you’re still responsible for that debt if it can’t be paid. This means you should still need to be able to afford it. It will affect your debt service ratios and will be included on your credit report for lenders to see. 

    When it comes to your credit score, it can help build your score or tear it down. What happens is based on whether the person you agreed to the co-signed mortgage for makes their monthly mortgage payments on time or not. If they do, you see the credit benefits without having to make the payments. If they don’t, however, then you’re responsible for making those mortgage payments, but the damage will already be reflected in your credit report. If you’re unable to pay the mortgage, then that default will also show on your credit report. 

    Co-signers and First-Time Home Buyers

    As a first-time home buyer, there are many different benefits you’re entitled to. That said, having a co-signer on your mortgage application can affect these benefits.  While you may not have to give them up altogether, they will be affected, and you could receive less.

    Why is this exactly? Well, it’s generally because co-signers have already purchased a home. This is in the case of a guarantor. In the case of a co-borrower, you’re likely just to have the benefits reduced or have to share them. 

    Benefits of Co-signing for a Mortgage

    When it comes to co-signing for mortgage loans, there are more benefits for the primary borrower than there are for you. That said, having a large loan with on-time payments does look good on your credit report. It will likely increase your credit score, and if you aren’t looking to borrow funds anytime soon. That said, if you’re a co-owner, you do have access to equity in the home. 

    The main benefits of co-signing for a mortgage go to the primary borrower. If you’re co-signing, it’s likely difficult for them to get a mortgage on their own, and they’re looking for a way to qualify. It can be challenging to get a co-signer, so they’re lucky to be able to find one. 

    Disadvantages and Risks Associated with Co-signing

    While there aren’t many benefits when it comes to co-signing for a mortgage, there are plenty of risks. Or really, there are just a few significant risks. The primary risk is that the primary borrower is unable to make their payments. If this happens, then it means you need to make the payments or risk a default. This is a huge responsibility to take on. 

    Cosigning a Loan for a Friend or Family Member

    If you do decide to co-sign, you want to be sure that you’re co-signing for a person you can trust, like friends or family members. As a co-signer, you don’t want to have to make any payments; the idea is to help them get a mortgage they can afford by themselves. Unfortunately, though, sometimes things don’t always work out, and your financial situation can change so that you can be on the hook for the money. This is why you want to think carefully and make informed decisions before you decide to co-sign or not. 

    Credit Score Needed for a Mortgage with a Cosigner

    When you’re the primary borrower, your credit score doesn’t matter as much as the cosigner. Likely, your credit score is under 660, which is why a cosigner is needed. However, they do take both of your credit histories into account.

    One important thing to remember is that as you make your payments on your mortgage and keep up with your bills, you will be able to increase your credit score and get the mortgage solely in your name faster. A high credit score doesn’t just affect your purchasing a home; it impacts many different parts of your life. 

    When Should You Consider a Co-signer?

    If you have the down payment for a mortgage but just don’t quite meet the minimum requirements for a mortgage, instead of giving up, you may want to consider a co-signer. Co-signers essentially vouch for you to purchase the home, but you have to keep up with the payments. When they sign, they’re putting their finances and credit at risk. 

    When it comes to getting a co-signer, you don’t always have to have a joint mortgage. With a mortgage guarantor, they aren’t even on the title but their higher credit score can help you get a better mortgage rate. As mortgage rates rise and debt payments get higher and higher, many are considering co-signers. 

    Before you take on a co-signer, you want to be sure that you’re going to be able to keep up with the payments. As you continue to make your payments, you’ll notice your credit getting better. Since you need to renew your montage every few years based on your loan term, you may be able to get the mortgage solely in your name when you renew. They don’t necessarily have to stay on the mortgage for the full amortization of the loan.

    In most cases, borrowers need a co-signer because they don’t have a strong credit score, they have a short employment history, they don’t have a solid income, and, even if they’re approved, the mortgage rates make it impossible for them to afford. A cosigner can change their personal finance situation and help them save money.

    Credit Score Needed for a Mortgage

    While we have touched a little on the credit score needed for a mortgage, we should go over all of the different restrictions. As we mentioned, a lender considers a credit score of at least 660 in order to get a mortgage. The primary lender isn’t the only one you need to consider when looking into getting a mortgage, though. If you need CMHC insurance on your mortgage, then you need to make sure you meet their credit score requirement, which is 680. 

    If you’re looking to purchase a home but don’t quite have 680, then this is where a co-signer comes in. If you may be able to afford the payments but don’t quite meet the qualifications, then a co-signer can help with little risk, as long as their credit score is higher than 680. 

    How to Ensure You’re Protected as a Co-signor or Primary Borrower

    Whether you’re the primary borrower or a co-signer, you want to be sure that you’re protected and prepared for any situation. The best way to do this is by consulting with a real estate lawyer. Depending on your position, before entering into the mortgage, you may want to consider what the implications could be in the event everything goes wrong. Some even recommend getting a separate contract, apart from the mortgage contract, put into place that covers all possible scenarios. This way, there’s a plan in place for worst-case scenarios. 

    Final Thoughts

    Mortgages can be very difficult to get. Not only do you need a good credit score, but you have to meet certain income requirements and have a down payment. Sometimes, even if you have all of these things, you need a little extra help. The best way to do this is with a co-signer or a guarantor. Either one of these will co-sign for you and help you get the mortgage that you need,

    As a cosigner or a guarantor, it’s important that you do your research before you decide to co-sign. There are plenty of risks that come with co-signing a loan of any kind. It’s more common for co-signers to co-sign on things like auto loans and personal loans. Mortgages last much longer than either of these and can affect your credit score as well as your borrowing power. No matter what you decide to do, though, there are benefits; you just have to weigh your options and make sure you can trust the primary borrower. 

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