Are you thinking about buying a home but worried that you might not qualify for a mortgage? You might be considering asking a family member or friend to help by becoming a co-signer. But, wait! Before you do that, you should know about the risks of buying a home with a co-signer. Let’s dive into what a co-signer is, the co-signing mortgage risks, and much more!
What is a Co-Signer?
A co-signer is someone who agrees to take responsibility for your mortgage. They help you qualify for a loan when your credit or income isn’t enough by themselves. Usually, the co-signer has better credit or more income. But, if things don’t go as planned, there can be risks involved!
Should I Use a Co-Signer for a Mortgage?
Many people wonder, “Should I use a co-signer for a mortgage?” Here are some points to consider before making this big decision:
– Improving Chances: If you have a low credit score, having a co-signer can improve your chances of getting the loan!
– Shared Responsibilities: Being a co-signer means sharing mortgage responsibilities. This could be good, but it also means both parties are impacted if something goes wrong.
– Financial Risks: If you miss a payment, it affects both your and the co-signer’s credit score! So, you need to be sure you can handle the mortgage payments before signing.
Who Can Co-Sign a Home Loan?
Not everyone can be a co-signer! Usually, people choose close family members, like parents, because they trust them. But technically, anyone who has a good credit rating and income can be a co-signer. Here’s a quick list of potential co-signers:
– Parents
– Grandparents
– Siblings
– Close friends
Co-Signer Mortgage Rules in Canada
If you live in Canada, there are some specific co-signer mortgage rules you should know:
– Credit Impact: The co-signer’s credit will be impacted as if they are the primary borrower. This means, if you fall behind, it will hurt their credit score too!
– Income Consideration: Lenders may consider the co-signer’s income to help you qualify for a bigger loan.
– Legal Implications: If you default on the loan, the co-signer might be taken to court! They legally have to pay back the mortgage debt. Make sure to discuss this with your co-signer beforehand.
Financial Risks of Co-Signing
There are various financial risks of co-signing. Here’s what could happen:
– Debt Responsibility: If you can’t pay your mortgage, your co-signer is on the hook! They might have to pay the entire mortgage!
– Credit Score Hit: Missing payments can lower your co-signer’s credit score, which impacts their ability to borrow money in the future.
– Loan Approval Issues: If your financial situation changes (like losing a job), it might also affect your co-signer.
Removing a Co-Signer from Mortgage
You might think, “What if I want to remove a co-signer in the future?” The good news is that it’s possible, but it can be a longer process. Here are steps you can take to remove a co-signer:
1. Refinance the Mortgage: You can refinance the mortgage to remove the co-signer. This means taking a new loan just in your name.
2. Improve Your Credit: If your credit score improves, lenders may be willing to give you a loan without a co-signer.
3. Pay Down Debt: Paying down other debts might help your chances of qualifying on your own.
Co-Signer Credit Impact
Being a co-signer can affect your credit in noticeable ways. Here’s how:
– Credit Utilization Ratio: Adding a co-signed loan increases the total debt amounts on your report.
– Hard Inquiries: If the lender checks the co-signer’s credit, that inquiry could lower their score temporarily.
– Responsible Borrowing: If the primary borrower (that’s you!) is financially responsible, it may positively affect both of your credit scores in the long run.
Shared Mortgage Responsibilities
When you share a mortgage, both you and your co-signer have responsibilities. Here are a few:
– Repayment: Both you and the co-signer must ensure payments are made on time.
– Communication: You both need to keep in contact about the mortgage and any financial changes.
– Decision Making: Both parties might have a say in decisions regarding the home, like selling or refinancing.
Legal Implications of Co-Signing
Co-signing isn’t just a favor. There are legal implications too. Here’s why:
– Contractual Obligations: Signing means you’re entering into a legal contract. You are bound by its rules and regulations.
– Potential Lawsuits: If payments are not made, the lender can sue both the primary borrower and the co-signer for missed payments and/or the total mortgage amount.
– Property Rights: Co-signers generally don’t automatically gain ownership of the home; however, they are responsible for debts associated with it.
Why Consider a Parent Co-Signer Mortgage in the GTA?
In the Greater Toronto Area and places like Milton, Mississauga, and Georgetown, the housing market can be pretty tough. Here’s why having a parent as a co-signer may help:
– Financial Support: They may provide you with financial support and may help you afford a nicer home.
– Trust Factor: Parents typically have your best interests in mind, making them a wise choice for many.
– Knowledgeable: Many parents have a good understanding of the job market and real estate, which can help guide you in your home-buying journey.
Frequently Asked Questions (FAQs)
1. What happens if the primary borrower defaults?
If the primary borrower defaults, the co-signer is responsible for the loan payments. This can hurt their credit!
2. Can I buy a house with multiple co-signers?
Yes! Some people have more than one co-signer, which can boost your chances of getting approved.
3. Will the co-signer live in the house?
Not necessarily! A co-signer doesn’t have to live in the home but is responsible for the mortgage.
4. How do I find a reliable co-signer?
Talk to trusted friends or family members and explain the risks involved. It’s important to have someone who understands the commitment!
5. Can I still live alone with a co-signer?
Yes! You can live in the house alone, but you must ensure that both you and the co-signer meet the mortgage obligations.
Take Action!
So, now that you know the risks and rewards of co-signing a mortgage, what’s next? If you are thinking of buying a home, make a plan! Talk to a trusted adult about co-signing and weigh the pros and cons. Finding the right home is exciting, but doing it wisely is even better!
If you found this post helpful, be sure to share it with someone who might need to know about co-signing! Or leave a comment below with your thoughts! Happy house hunting!
