As average home prices in Canada top $500,000 (and rise above $1 million in cities like Toronto and Vancouver), some Canadians may wonder if they’ll ever be able to buy the place of their dreams. One option for some is to find another person—a parent, sibling or another close relative—to co-sign their mortgage.
Why Would Someone Ask You to Co-Sign?
Co-signing a mortgage is a way to help someone else get a mortgage for a home. If your loved one has poor credit, low savings or isn’t employed, agreeing to co-sign may help lenders look past your family member’s circumstances. If your relative is looking for a house that’s slightly out of their price range, agreeing to co-sign may help them get a bigger loan than they would otherwise be able to qualify for on their own.
Risks of Co-signing Someone Else’s Mortgage
If a family member asks you to co-sign their loan, should you agree? Co-signing is a big commitment. By signing, you agree to buy the home with the primary borrower. If your loved one is unable to make the mortgage payments on their own, you’ll have to pay the lender from your own accounts. This may put a strain on your relationship…and your finances.
Co-signing may also affect your prospects of getting a loan in the future. If you’re already a co-signer on a large mortgage, other lenders may be less likely to extend you additional credit when you’re in need.
The Co-signing Process
If you agree to co-sign a mortgage, the lender will need to approve you just like any other borrower. You’ll have to provide documents like proof of income, a list of current debt obligations, and your credit score. Even if you agree to co-sign a mortgage, the lender may still decline to offer a loan if you don’t fit their criteria.
Pro-tip: When co-signing, you may want to consider asking the primary borrower to take out life insurance, which can help you make mortgage payments if they pass away or become disabled.
Alternatives to Co-Signing a Mortgage
If you’re uncomfortable co-signing a mortgage, be honest with the person asking you. If they have low savings, a significant amount of debt, or are unemployed, you may want to counsel them to wait before applying for a mortgage. If they’re unsure, consider recommending mortgage calculators to see how long they should wait before entering the market.
Co-signers Vs Guarantors
Both co-signers and guarantors are legally responsible for making payments if the primary borrower is unable. However, unlike co-signers, guarantors don’t become a legal owner of the home.
Co-signing a loan is a big commitment that you shouldn’t take lightly. Only co-sign a loan if you completely trust the primary borrower and could live with making the mortgage payments yourself.
As long as both of you come to the decision that makes the most financial sense, co-signing a mortgage is one solution to getting your loved one into the house of their dreams.