Have you ever been asked to co-sign or become a Guarantor for someone on a loan or mortgage? This is generally something that is considered very personal to people and usually involves close family members or parents and children. Having sufficient income is not all that is necessary to obtain a mortgage. The borrower must also have a certain level of credit to be approved. When a client has sufficient income but too much debt, as a mortgage agent, I will recommend they have someone co-sign or be a guarantor on their mortgage to be approved. There are differences between being a co-signer and being a guarantor. It is important to know these differences and make sure you are comfortable with your responsibilities when you agree to help someone secure a mortgage.
When purchasing a property in Canada and requiring a co-signer to secure the mortgage, the co-signer must reside in Canada; there may also be even stricter stipulations depending on the lender. Some lenders will require the co-signer to reside in the same province as the initial borrower and or of the property being purchased as well. Although a relative can commonly co-sign on a mortgage, it is not a requirement that the co-signer and borrower be related. Also, the co-signer does need to qualify for the mortgage in order for the loan to be approved. This means that they must have sufficient income and excellent credit history as if they were applying for their own financing. It is important to keep in mind that any other mortgages the co-signer has will be part of the debt load. A co-signer will be legally registered as an owner of the property. They sign legal documents regarding the property and are liable for mortgage payments in the event the borrower defaults on loan payments. For a co-signer to be removed from legal ownership of a property, the borrower must reapply for the mortgage (covenant release) and be successful at qualifying without the co-signer.
A Guarantor is someone that guarantees to pay any mortgage payments that the borrower does not follow through on paying. Therefore, the guarantor must have a source of income and also have excellent credit to be approved. Guarantors are NOT listed as a titleholder on a property. If mortgage payments are not made by the borrower, the guarantor is responsible for making the payments while not having any rights to the actual property. Many Guarantors are parents helping children secure a mortgage because they either do not have enough credit history or have small delinquencies on their credit history.
Co-signers and Guarantors must also keep in mind that all loans they have signed onto will be taken into account when applying for any other type of credit. 100% of the payments will be included in debt ratios by all lenders when considering any type of financing.
With the current stipulations in place for home buyers, it can make home ownership seem unattainable, especially if there has been any kind of credit issues or delinquencies in the past. Having someone become a co-signer or guarantor on a mortgage can make all the difference and may be the best scenario for many people that are capable of making the payments required.
As a co-signer or guarantor it is important to research and understand the responsibilities but also important that you have full trust in the person you are helping out. For the majority of situations, it is very rewarding to help someone accomplish their home ownership dream while also strengthening your own credit history.