Mortgage Basics

Co-signing a Mortgage Loan

Co-signing a Mortgage Loan
Written by
  • Ashley Howard
| 12 August 2024
Reviewed, 27 September 2024
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    If you lack sufficient income or don’t have a credit score that meets the requirements for a mortgage, you may look to a co-signer to help you qualify. Co-signing a mortgage puts the co-signer in a legal position to repay the loan if the other borrower defaults. This can have many consequences for your finances and credit score, so it’s important to consider the potential risks of co-signing a mortgage before you agree to do so. 

    If you co-sign a mortgage and the other party can no longer make payments, you could be liable to cover mortgage payments, property taxes, homeowners insurance, utilities, and condo/strate fees. This added financial responsibility could negatively impact your financial stability, so you must understand your obligations before agreeing to co-sign or become a guarantor on a mortgage.

    Key Takeaways

    • A co-signer is not just a co-borrower; they are also listed on the property title and have ownership rights to the property.
    • A guarantor is a co-borrower with no ownership rights to the property.
    • Being a co-signer or a guarantor can impact your eligibility for obtaining other forms of credit.

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    What Does It Mean to Co-sign a Mortgage?

    Being a co-signer for a mortgage means guaranteeing that the primary borrower is financially reliable. Co-signing makes you equally responsible for making mortgage payments regardless of whether you contribute to the mortgage or live in the subject property. Some co-signing arrangements can impact your responsibilities if the other borrower terminates the mortgage agreement or dies. 

    Difference Between a Mortgage Co-signer and Mortgage Guarantor

    Sometimes, co-signer and guarantor are used interchangeably, but they have different implications for the borrower and anyone else on the mortgage. Co-signers share equal responsibility for the mortgage and are added to the property’s title. Guarantors are not added to the title and are only held liable if the primary borrower defaults on the mortgage. 

    Lenders may require you to become a co-signer rather than a guarantor if, for example, most of the income, downpayment, or net worth is attributed to the person listed as a co-borrower on the mortgage application. As co-signers are added to the property title, the mortgage may need to be refinanced later to remove the co-signer once the primary borrower can qualify independently. 

    Acting as a guarantor could affect your eligibility for obtaining financing, such as home financing, refinancing, or car financing. When the mortgage is up for renewal, if the primary borrower can qualify for the mortgage without the guarantor, there is no need to refinance since you’re not on the property title.

    Ownership Structures

    When adding a co-borrower, you can choose between two ownership structures: joint tenancy and tenancy in common. 

    Joint Tenancy

    With this tenancy structure, each co-owner has an equal share of the property. Each co-owner must approve the home’s sale, refinance the mortgage, or make major changes like renovations. If one of the co-owners dies, the share of the property automatically goes to any remaining co-owners. 

    Tenancy in Common

    With this tenancy structure, each co-owner has a specific share in the property that is typically based on the financial contribution. This share becomes part of the estate and will pass on to any heirs or next of kin who will inherit the share of the property if the co-owner passes. 

    When you co-sign a mortgage, you are agreeing to take responsibility for repaying the loan if the borrower fails to make payments. Each owner can sell or transfer their portion without requiring the consent of other co-owners. A co-owner’s share can be sold to other co-owners through a deed of trust. Tenancy in common is limited to standard charge mortgages. 

    Advantages and Disadvantages of Having a Co-signer or Guarantor

    As a Borrower

    A co-signer can help increase buying power, allowing you to qualify for a mortgage more easily or for a larger one. Having a co-signer with a strong credit score can also help borrowers with less-than-ideal credit avoid higher interest rates. A mortgage can help you boost your credit score by making timely mortgage payments.  

    However, taking on too large a mortgage could leave you financially unable to keep up with payments, impacting your credit score and co-signer’s. The property could be foreclosed if you and your co-signer default on mortgage payments for 180 days or more.

    As a Co-signer

    As a co-signer, you can help loved ones achieve their homeownership goals and help them secure better terms for their mortgage. However, if you act as a co-signer, there is a risk to your financial health and credit if the primary borrower misses or defaults on payments. You may also be limited in how much new debt you can take on yourself as a co-borrower on someone else’s mortgage. 

    Legal and Financial Implications

    Before agreeing to be a co-signer or guarantor, you must fully understand your decision’s legal and financial implications. Lenders will view you as equally responsible for the mortgage as the primary borrower. If they cannot make payments, the lender will come to you for repayment. 

    The mortgage is considered part of your debt even if you are not financially contributing to payments. This can affect your ability to secure more credit or other loans. Any late mortgage payments or defaults will affect the primary borrower’s credit score and yours. 

    Additionally, if you have yet to take advantage of any first-time homebuyer incentives, being on the title of the home could disqualify you from programs such as the RRSP homebuyers plan, land transfer rebates, and other incentives.

    Requirements for Co-signers and Guarantors

    Not everyone can be a co-signer or guarantor. Most lenders will look for a credit score of 680 or higher, proof of steady employment and verifiable income, and debt-to-income ratios below 35% for GDS and 42% for TDS. Most lenders also require any co-signers or guarantors to be Canadian residents and will confirm that no taxes are owed through the most recent Notice of Assessment (NOA).

    How to Remove a Co-signer From Your Mortgage

    There may come a time when you no longer require a co-signer on your mortgage and wish to have them removed. This process requires you to qualify for the mortgage on your own. You will need to refinance the mortgage under your name and have pre-approval or approval from the lender to release the co-signer. 

    If the co-signer is a spouse and you wish to remove them due to divorce or separation, your lender may allow you to complete a release of covenant without the need to refinance or complete a spousal buyout. This can save you from paying penalties to break the mortgage terms. 

    Frequently Asked Questions

    What does it mean to co-sign a mortgage?

    When you co-sign a mortgage, you commit to repaying the loan if the primary borrower fails to make payments. You agree to act as a financial backer for the mortgage and share the responsibility for mortgage payments, property taxes, homeowners insurance, and utilities.

    What sets apart a co-signer from a guarantor?

    Co-signers have an equal share of responsibility for the mortgage and are on the property title, giving them ownership rights to the property. Guarantors only share the responsibility for repaying the mortgage if the primary borrower defaults and does not have ownership rights.

    What is the process for removing myself as a co-signer from a mortgage?

    To be removed as a co-signer the primary borrower typically needs to refinance the mortgage into only their name. This may involve costs to break the mortgage as well as legal costs. If the removal is due to separation or divorce, some lenders might allow a release of covenant, which does not require a refinance.

    Final Thoughts 

    If you’re considering co-signing or guaranteeing a mortgage, it’s crucial to recognize the impact this can have on your future. It can affect your relationship with the primary borrower, credit, and finances. It’s important to establish clear expectations and prepare for potential situations that could arise, like missed payments or changes in financial circumstances. 

    If you’re thinking about co-signing, being a guarantor, or are a borrower considering asking someone to co-sign or be a guarantor, contact our team of mortgage professionals for tailored advice.