There may come a time when a family member or a friend may ask you to co-sign a mortgage for them. What kind of responsibilities come with this commitment and what will it mean to your future financial plans?
Firstly, many potential co-signers don’t realize that they are considered by the lender just as responsible for the mortgage as the primary applicants. A co-signer is basically a co-owner, regardless of whether they will live in the property or not. This means that if the person you co-sign for cannot make the mortgage payments, the lender will look to you for payment, although many lenders say this would be their last recourse as they would do their best to make arrangements with the homeowner. However, if payment is not made and the lender proceeds with a foreclosure, the co-signer will also be named in the proceedings and will be impacted just a negatively as the primary applicant.
Likewise, the lender will scrutinize the co-signer just as closely as they do the other applicants when applying for a mortgage. All of the assets, debts and income belonging to the co-signer are included on the mortgage application and a credit report is examined. The lender will require the co-signer to be listed on the title and sign all of the mortgage and legal documents. In fact, the co-signer can expect to remain on title until the primary applicant qualifies for the mortgage on his or her own.
Before agreeing to the role, co-signers need to evaluate the time commitment they’re willing to make. If, for example, they want to buy their own home in a few years or take on any major debt such as a car or holiday trailer loan, they may not qualify because of the mortgage they have co-signed for. It’s important for all of the applicants to speak with their Licensed Mortgage Broker about ways in which the primary can prepare to take on the mortgage themselves and also to illustrate for the co-signer any limitations the mortgage may impose for future loan qualification.
A quick note here – often times the term “guarantor” is used interchangeably with “co-signer” but there is actually significant differences. A guarantor promises to carry the entire debt should the homeowner default but they don’t have the luxury of being on the title, so they don’t have any claim to the property. Therefore a guarantor has less control than a co-signer, and fewer rights.
In either case, as well as consulting with your Licensed Mortgage Professional, it would be prudent to seek advice from a lawyer who is independent of the real estate transaction to fully understand all of the responsibilities and ramifications of the co-signer role.