With our high mortgage qualifying rates at the contract rate plus 2% (approximately 7.5% today), and today’s high-priced real estate, it can be very difficult to qualify for a mortgage.
Even with good income and some funds saved for a downpayment, you may not qualify for the mortgage amount you require to get into the type of property you want to own. As a result, you may require a co-signer.
Here’s what you and your co-signer need to know about them signing onto your mortgage.
• If you are unable to make the payments for any reason, your co-signer will be expected to make them on your behalf. By signing the mortgage documents, they assume full responsibility for the payments.
• Whether someone is the principal borrower, co-borrower, guarantor or co-signor, if you’re on the mortgage, you’re 100% responsible for the debt of the mortgage and everything that goes along with that. A co-signer has all the same legal obligations as everyone else on the mortgage.
• If payments aren’t being made, there is a chance the lender will take legal action against the co-signer. That includes all available collection methods, such as obtaining a judgement in court or garnisheeing wages or bank accounts. They could even go after the co-signer’s property or assets in order to cover the losses.
• When you co-sign for a mortgage, all of the debt of the co-signed mortgage is counted against you. That means that if you’re looking to buy another property in the future, you will have to include the payments of the co-signed mortgage in your debt service ratios, even though you aren’t the one making the payments. That could significantly impact the amount you can borrow in the future.
• Once the initial term has been completed, the co-signer will not automatically be removed from the mortgage. The person who was co-signed for will have to make a new application for the mortgage in their own name and qualify on their own merit. If they don’t qualify at that time, the co-signer will be kept on the mortgage for the next term.
There are also other potential issues to take into consideration before signing on to someone’s mortgage and it’s prudent to seek both tax and legal advice from professionals.
• There can be implications with respect to your personal income taxes. You may accumulate an obligation to pay capital gains taxes down the road. This should be discussed this with your tax accountant.
• Co-signing may impact Land Transfer Tax Rebates for first-time homebuyers.
• You are entrusting your credit history to another party.
Before co-signing for any debt, ensure you fully understand all of the potential implications and how it could affect you personally.
I am happy to have a conversation if you are considering co-signing on a mortgage, so please give me a call at 1-888-561-2679.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.