What Does it Mean to be a Co-Signer on a Mortgage?
It is a well-known fact that children nowadays continue living with their parents longer and longer. While there are substantial benefits to residing with parents, eventually, grown children need to grow up, move out, and finally live on their own. With student debt crippling personal finances, unwavering high house prices, and a higher standard of living, it is harder and harder for children to fly the coop.
In many instances, grown children save diligently, but are not quite at the point where they can purchase a house in their own name. They need that little extra help to turn that wish into a reality. At this point, parents can decide to co-sign the mortgage loan, so their child’s application will be approved by the bank.
What is a Mortgage Co-Signer?
When a mortgage application is submitted, a lending institution will review the applicant’s credit score, past debt repayment history, and income to determine if they qualify for a loan. If any of these areas are unfavourable, a co-signer will be needed to counter the applicant’s financial weaknesses. Anyone who is an adult with a solid, reliable income and good credit history can co-sign a mortgage. It is possible to have more than one co-signer on a mortgage loan, too; an example would be two parents co-signing for their child. Depending on the financial lender, non-residents may be able to co-sign as well. New changes to CMHC rules now restrict co-signing. If an individual already has a CMHC insured mortgage, they can no longer be a co-signer on a new mortgage through CMHC.
When an individual co-signs on a mortgage, it means they will make the loan payments in the event the primary borrower can’t. They are now fully responsible for that debt even if the borrower makes the payments every month. If the borrower fails to make payments, the bank will be calling the co-signer to collect what is owing.
How is the Co-Signer Affected?
When you write your name on that application as a co-signer, your credit score is applied to the mortgage. Therefore, the repayment history of the mortgage loan will have an effect on both your and the borrower’s credit score. There is a risk that if the borrower fails to uphold his or her financial obligations, the co-signer’s credit score could suffer, which can be detrimental to them should they want to obtain a loan in the future.
A few other key things to note: although the co-signer has no legal ownership rights to the property, they will be listed on the mortgage and title of the property. One must also realize that co-signing a loan can make a person liable in any legal action, meaning his or her personal property could be at risk if a lawsuit were to be filed. Lastly, the amount owed by the borrower will also show as owed by the co-signer, which increases their debt.
Can Co-Signers Remove Themselves From Mortgage Deals?
If the borrower is fulfilling his or her financial obligations and making payments consistently in a timely fashion, it is possible to remove a co-signer from the equation. When payments are made, a credit record is established by the borrower. When they have a good payment history, a lender may agree to refinance the mortgage without a co-signer, allowing the current one to cut ties with the mortgage loan. Depending on the financial institution and their rules/flexibility, some are willing to remove a co-signer’s name after several good payments have been made.
Although parents want their grown children out of their childhood home, they may need to help a bit more to make that happen. Before signing the application though, they must be aware of how the loan can affect their own finances.