As mortgage qualification guidelines have tightened over the last few years, I have seen an increase in the number of people co-signing for family members, and families purchasing homes together.
I have mixed feelings about going down the road of asking for a co-signer while working on a mortgage application.
If all goes according to plan, buying a home with a co-signer can be a brilliant fit. Sometimes life happens, and things can go very sideways for co-signors.
From my perspective, one of the key things I consider is the exit strategy for the co-signors.
Over the last few months I’ve worked with several clients who needed co-signers to qualify to buy their homes. In each case, there were slightly different reasons that the clients had challenges qualifying on their own:
- One borrower was in a casual position with only a one-year history at the hospital. As an RN, she was working full time, but had no guaranteed hours.
- Another borrower had no credit history as all of the family credit had been in her ex-husband’s name
- One family’s ratios were too high due to a large truck payment
- A single mom had some bumps in her credit history as she had to deal with extraordinary medical and travel expenses to care for her child that had to be at B.C. Children’s Hospital six times a year for treatments while he was younger
- Despite carefully managing their money and saving their down payment over the last 10 years, another family only qualified to borrow about $300,000. There was nothing suitable at that price point in our housing market
In each of these situations, I was confident that with some time each of the clients would be able to qualify for their mortgages on their own.
- For the first client, once she had either a two-year history of income in her casual position or a guaranteed full-time position, we would be able to remove her co-signer
- For the newly divorced mom, we are working together to help her build a credit history of her own so that once she has a proven track record her co-signer can be removed from the mortgage
- For the third family, they had another year and a half on their truck loan. We have a plan in place to revisit their application as soon as the truck has been paid off.
- As her son has grown older, his health has improved so trips to Vancouver are few and far between. She has a better paying position at work and is meticulously managing all of her credit. Early 2022 we will be connecting to remove her co-signer
- For the last family, once their youngest child was in school full-time the mom went back to work full-time. We will be revisiting their application next fall
So why am I particular about requesting a co-signer?
If 2020 has taught us anything, it is that life can throw us curve balls.
Despite our best-laid plans, sometimes things don’t come together as anticipated. This could happen in each of the above situations. Work situations change, unexpected health issues arise, vehicles kick the bucket, and turning finances around can be more challenging than anticipated.
What can this mean for the co-signer?
Co-signing for someone else’s mortgage means that the new mortgage payment is factored into the calculations for any of your future credit applications. This means that the sooner your name is removed from the application, the better.
If the person/people you have co-signed for run into financial difficulties and are unable to make their mortgage payments, you are fully responsible for covering them. If they default on the payments, this can affect your credit history as well.
There are some important considerations to think about before you ask someone to co-sign for you, or if you are being asked to co-sign:
- Is there a clear exit strategy for the co-signer?
- Are there potential any tax implications down the road with this property? For instance, might there potentially be capital gains to deal with?
- Does everyone have wills in place to address what happens if someone passes away?
- What is the plan if the primary borrowers are not in the position to remove the co-signer down the road? How might this affect family relationships?
- Do the primary borrowers have adequate insurance in place to help sustain them in the event of death or disability?
- If its been a while since you did a mortgage application, things have changed. You may find the process onerous. You will be asked to provide full financial disclosure and documentation to support your application.
If you are asked to co-sign on a mortgage, I recommend the following:
- Seek independent legal advice so you fully understand what you are signing up for
- Have difficult conversations upfront to talk about what your expectations are in terms of how long you want to be committed to this mortgage, and what will happen should the primary borrowers not be able to remove you from the mortgage down the road
- Make sure you have access to online information to periodically check and make sure mortgage payments are being made as agreed
If you’ve made it this far, you are probably thinking I am against using co-signers with my clients. That is not the case. There is a time and a place, and having co-signors available has made home ownership possible for many families that might not otherwise qualify on their own.
I do feel, however, that it is extremely important that if you are considering co-signing for someone that you go in with your eyes open and fully understand what you are signing up for.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.