With today’s “stress test”, and tougher mortgage qualification rules, many borrowers are requiring the help of a co-signer on their mortgage. But many people don’t really know what that means.
A co-signer essentially becomes a “co-borrower” on your mortgage, and they’re as legally responsible for making payments as you are. You’re using their income & credit strength to qualify for a larger mortgage than you would qualify on your income alone. The co-signer needs to be vetted as much as you and provide the same documentation. Since the total income on an application is used to determine the size of mortgage you can borrow, adding more income helps many buyers borrow a larger mortgage. It’s not a question of affordability, but qualification.
Generally, a co-signer is a parent or close relative, as they’re the ones willing to put their neck, income and credit on the line. Lenders also prefer this, as it’s easier for parents to assist in taking action if there are problems. Co-signers need to discuss whether they’ll be putting their name on title. This will give them a legal right to the home and control things in the event of problems. Co-signers also need to know that it could affect their own ability to borrow money in the future as the mortgage payment amount, and payment history, will also show up on their personal credit report.
Co-signing is not a “life sentence” though. Just because you have one, doesn’t mean they’ll need to stay on your mortgage forever. Co-signers can be removed at any time, by approaching the lender and asking. As soon as you’re strong enough to qualify on your own, it’s a good idea to do so.
Doug Neufeld, BBA, AMP
Senior Mortgage Planner
Dominion Lending Centres – Mortgage Negotiators