Co-Signing
WHY CO-SIGNERS?
With house prices increasing, government qualifying rules tightening, and income documentation becoming more onerous from banks and lenders, more and more Canadians are enlisting the help of a Co-Signer (or co-purchaser, these titles can be used interchangeably) to make the purchase of a home possible. A Co-Signer helps support the income qualification on paper for an applicant, by going on the property title and mortgage as well.
THE MECHANICS OF CO-SIGNING
Application taken, documents collected, and credit checked just like the main borrower.
Co-Signer signs the mortgage documents and is registered on title with the borrower (in some cases, title can be registered 99% in the borrowers' name and 1% in the Co-Signers name in order to use 99% of the First Time Home Buyer benefits if applicable, but talk to a lawyer about the risks/benefits of this).
WHAT MAKES A GOOD CO-SIGNER?
An individual with strong credit and low monthly debts compared to their monthly income is ideal for Co-Signing. Also, a high degree of trust is required, since the Co-Signer will also be liable for the debt if it is not paid on time and in full, so in many cases a Co-Signer is a family member.
WHEN CAN A CO-SIGNER BE REMOVED?
A rule of thumb is that any lender will allow a Co-Signer to be removed from the title/mortgage during a mortgage term after 12 months (often a $350 covenant change fee will be charged, in addition to legal fees charged by your solicitor). If the original borrower can then qualify for the mortgage on their own (on paper) or if there is another borrower who wishes to replace the original Co-Signer. At the time of sale, a Co-Signer would be released as well.
THINGS TO CONSIDER
Financial transparency between all parties is critical as any mortgage commitment received will outline the qualifying income for each applicant. Both parties will need to be comfortable with this level of disclosure.
Independent Legal Advice is always a good idea before co-signing.
The debt is the Co-Signers debt too, so trust is extremely important. The Co-Signer is responsible on paper, even though they most likely won't make any of the actual payments. The debt would be considered in any future borrowing calculations.
Speak with your accountant about any tax / capital gains considerations.
Consent will be required from any spouse not signed on as an additional Co-Signer, to be arranged at your solicitor's office.
CO-SIGNERS VS. GUARANTOR
When an applicant needs help with the income aspect of their loan application, a Co-Signer is required (and put on title, with a claim to the property). When an applicant has satisfactory income but tarnished or thin credit, then a guarantor may be suitable (not on title, no claim to the property).
MY PARENTS ARE RETIRED, CAN THEY CO-SIGN?
Yes! Retirement income does qualify and there is no age limit, so your retired co-signers are still an excellent option.
*OAC, E&O; this is not legal advice. Consult your lawyer and/or accountant for any additional considerations.
