Co-signor FAQs - What Do I Need To Know?
Buyers are increasingly being priced out of the market - especially first-time purchasers who have yet to fully grow into their career income potential. This is due to the combination of rapid house price increases together with rising interest rates (therefore stress test rates).
This has led to a growing number of requests for information on whether a co-signor can help, how does it work, and does this role impact the co-signor in any way.
Let's cover the basics.
When is a co-signor needed?
When a lender is reviewing a mortgage application, they look first to credit reports. They are looking to see how someone has dealt with small dollar debts before taking a risk on something much larger. If they like what they see, then they compare mortgage and debt payments to gross income. The total of those payments can't be greater than a certain percentage of income. That is how they determine how much they will lend.
If someone's credit is thin or bruised, that can be a scenario where a co-signor becomes involved to bring strength, history and stability to an application.
More frequently, the primary borrower either doesn't have enough income or has too many debt payments preventing them from qualifying for the desired mortgage amount. A co-signor adds their income (and debt payments) to the request, so that together they can qualify for the larger mortgage amount requested.
Is a co-signor on title?
View a consignor like another buyer. They are on title to the property and a party to the mortgage. When someone looks at the co-signors' credit report, they will see the new mortgage listed there.
Does a co-signor need to be on title?
Where the only reason to have a co-signor is because more income is needed - and there is a clear indication that the primary borrower income will grow over the next couple years to a point where they can qualify for the mortgage on their own, then we can look at a Guarantor role.
The Guarantor backs up the mortgage but is not on title to the property. The mortgage will also not show on the Guarantors' credit report.
What are the risks to a co-signor?
A co-signor is liable for the full amount of the mortgage just like any other borrower. If the primary borrower is unable to or ceases to pay the mortgage, then the lender will call on the co-signor for payment.
If the co-signor has personal plans that involve taking on new debt themselves, then co-signing a mortgage will reduce what they are able to qualify for themselves.
Are there any tax implications to the co-signor?
Let me start by saying I am not a tax accountant or attorney by choice - so definitely reach out to your own tax/legal professional for this question.
For CRA purposes, your lawyer typically will register ownership as 99% primary purchaser(s) and 1% co-signor(s). So, the exposure to capital gains or other tax-related items when you are removed as a co-signor is very small. You can research legal terms: ‘tenants in common' vs ‘joint tenancy'
Can a co-signor ever get out of this role?
Absolutely. As soon as the primary borrower(s) are able to qualify on their own, then a request is made to the lender to remove the co-signor. The lender will charge an approximate $350 fee to re-decision the file.
If ratios and credit support the primary borrowers going on their own, then the lender advises your lawyer to release the co-signor. It is approximately $4-500 to remove the co-signor from the mortgage and title to the property.
To be clear, this is always at the lender discretion, but I am not aware of it ever being an issue.