There’s more to the small print than meets the eye.
If you have a child or family member with a low-income needing help to buy their first home, or a friend or newly arrived immigrant who can’t get approved for a loan on their own, you may be asked to be a co-signer for them.
A co-signer is typically required if the person applying for a loan or mortgage doesn’t have sufficient credit history or income for the loan.
Standing as a co-signer or guarantor has benefits, risks and responsibilities that you should be aware of. Here are 4 things to keep in mind:
- Trust and confidence in the primary borrower
Do you trust that the borrower is a responsible individual? Are you confident in their ability to make their mortgage payments? If you’re co-signing for someone who has strong money habits and a stable income – but just can’t quite get approved on their own because they haven’t been working long enough – you will probably feel comfortable taking on the responsibility.
But if in any doubt, don’t.
- Co-signing a mortgage is a legally binding contract
Co-signing is more than just a character reference – you are legally on the hook to cover the mortgage payments should the borrower not be able to do so.
You can however reduce the financial risks by ensuring the primary borrower obtains a Mortgage Life and Disability Insurance to cover the debt in case of the unexpected.
- Note the difference between a co-signer, co-borrower, and guarantor
While these terms are sometimes used interchangeably, it’s important to know the difference between them if you’re thinking of stepping into one of these roles.
The main difference between co-signer, co-borrower, and guarantor is the level of investment in the mortgage.
- A co-signer.
A co-signer agrees to take responsibility for paying the mortgage if the primary borrower can’t. If the borrower makes their payments as expected, the co-signer doesn’t need to pay.
- A co-borrower.
This person is jointly responsible for making mortgage payments from the beginning. While each co-borrower has equal ownership in the home, if one co-borrower fails to make a payment, it has an impact on both individuals.
- A guarantor.
The guarantor on the other hand, vouches for the primary borrower and guarantees the loan in the event the primary borrower fails to make their payments.
But, unlike a co-signer or co-borrower, a guarantor does not share in the title of the home.
- Co-signing will affect your financial flexibility and debt ratio
If you’re considering taking out a loan in the near future for your own purposes, becoming a co-signer could have an impact on your ability to qualify for credit due to your debt ratios.
Before you decide to co-sign a mortgage, make sure it’s not interfering with your personal plans or goals. At the same time, be sure that if you are required to step in and make mortgage payments, that your finances can support the extra burden to your cash flow.