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If you apply for a mortgage and learn that you don’t meet all of the financial requirements, what are your options? Should you consider getting a cosigner on the loan?
Follow along as Mujtaba Syed, Mortgage Specialist with the Bank of Montreal, discusses how a mortgage cosigner may increase your chances of getting approved for a mortgage. Mujtaba also explains when you may need a cosigner for a mortgage, possible financial/credit impacts to the cosigner and more.
The best time to use a cosigner is when you're not able to qualify for a mortgage on your own, according to Mujtaba. “A mortgage cosigner is someone who agrees to be added to the mortgage application to help if you're missing some sort of information,” says Mujtaba.
“That could be an income requirement or a credit requirement or asset requirement, depending on what the lender's looking for that you don’t have. Circumstances in which a cosigner might be warranted may include when your credit is not ideal. “You might have had some pre-payments in the past or some late payments in the past that are affecting your credit and your ability to borrow today,” he says.“
Or, if your income is slightly lower than where it needs to be, the cosigner can help alleviate that with their income and their credit,” Mujtaba says.
“What having a cosigner does is it adds a little level of security to the lender, saying that, ‘Hey, listen, we have one more person that they can rely on, God forbid, if something happens where the primary applicants are unable to repay,’” Mujtaba says.
In the example of two primary loan applicants and a cosigner, “the way it works is that all three applicants would be applying for the mortgage, and then the debt would be shared equally among the three so there's not really a percentage amount,” says Mujtaba.
If, for example, your brother has no income, you could potentially cosign for the entire amount of the loan, Mujtaba says.
The stronger the cosigner the better, so when you are looking for one, try to make it someone who’s in your immediate family,” he says, “because the lender always wants to know the relationship between the cosigner and the other applicants.”
A cosigner can be immediate family, such as a father, mother, brother or sister, for example. It could also be “someone else that could be considered immediate family and someone that has good credit and good income, someone that can actually make up whatever you're lacking, to kind of cover that with the bank so they feel comfortable approving the mortgage application,” he says.
“Because of the way the cosigner works, there's no difference between a primary applicant and a cosigner in the eyes of the lender,” Mujtaba says.
The banks or the lender will treat the applicants and the cosigner the same. “They're the same, whether it is the cosigner or the primary or secondary cosigner, they're considered to be owners of the home and have the same liability stake within the mortgage as well,” he says.
“Every situation is going to be different, but the good thing is the cosigner can contribute from 5% to 100%, depending on what your needs are. Sometimes it could be as much as 100% or sometimes your income's great, your credit's great, but you're slightly lacking and they only need to add an extra 5% of their income to help you qualify,” he says.
An important requirement, Mujtaba notes, is the cosigner is going to be a homeowner as much as the primary applicants are.“The cosigner technically owns a share in that home, so picking a cosigner is very important. It's something that you should do with a lot of thought and consideration because they will own that home just as much as you do,” he says.
The cosigner will also have a liability to pay back as much as the primary applicants do. “Look at it that way and make sure that the cosigner has good credit, good income. The whole idea is to make the application look as strong as possible to fill the gaps that you might be lacking or missing,” he says.
From the perspective of the cosigner, what is the potential impact on their credit or ability to purchase another home? For example, what if you cosign to contribute as much as 50% to the home’s purchase?
“The way we look at it is that you are actually that homeowner, even though you might not live there as a cosigner,” says Mujtaba. “You might just be helping out a family member, but that shows up on your credit bureau and on your assets and liabilities as if you are that homeowner.”
Lenders, he explains, will not consider the cosigner as one-third of the three parties on the loan. Instead, they view the cosigner as being liable for 100% just like they do for each of the other two parties in a three-person loan. That can impact the cosigner when they go to buy, for example, a car or a home for themselves, he says.
“A cosigner should also be very careful with all their details before becoming a cosigner because sometimes it takes some time to get their name off the loan,” says Mujtaba. “It can be as soon as six months, it could be a couple of years, depending on what the requirements are, depending on what they need to do.”
Helping family members is a good thing, he says, if you can, know what’s involved and you can do it. “But know what you're getting into. Have a conversation with the lender before you sign on as a cosigner,” he advises.
“If you feel uncomfortable with your family members, book a separate meeting with the lender, have a one-on-one with them to find out exactly what the implications are and to see if you can actually live up to those implications or live up to that responsibility of being a cosigner.”
A cosigner and a co-borrower are the same in the eyes of the lender, says Mujtaba. “We consider the cosigner to be a co-applicant, which is the joint applicant, which is a part owner of the home and part liability on the mortgage as well.”
“Technically, they really wouldn't be a cosigner, because if they're not really helping alleviate the application or making the application stronger, then it's probably best not to bring that cosigner on,” says Mujtaba. “That's a question that your mortgage specialist can actually have with you.”
Mortgage applicants sometimes bring in cosigners who can hurt the application more than help it be approved, such as in the event the would-be cosigner has too much debt or not enough income. In those cases, it’s best to seek out someone else to serve as a cosigner on the mortgage, he says.
Mujtaba is asked about cosigners often. “The way I explain this to my clients is that your cosigner was added to the mortgage to fill a gap. “To take a cosigner off could take as little as six months or it could take longer, but what needs to happen is that you need to fill that missing gap that the cosigner is filling.”
The gap could be credit-related in the event that your credit is still not where it needs to be when you go to remove the cosigner. Or, if your reason for needing the cosigner in the first place was related to income, to have the cosigner later removed, you would need to prove that you now have that income to get the cosigner removed, he says. “You might get a raise, you might get a new job, you might pick up some part-time work, those things, and now qualify.”
“Any time you make changes to a mortgage application, including removing a cosigner, you have to go through a reapproval process,” says Mujtaba.
“Because now you're changing the terms, you're changing the dynamic of the application, so we would have to do a new application at that time. If you want to take the cosigner off, we would see if you qualify to actually take this debt on yourself.”
Maybe a year ago, you couldn’t qualify for the mortgage without a cosigner, but you might today if your income or your credit has improved. “We will tell you during the application process if it's possible. If not, then we might come back and say listen, we've tried,” he says.
Have a conversation with your mortgage specialist if you’re considering approaching a cosigner to help you get the loan, says Mujtaba. "Say, ‘Hey, listen, I can get a cosigner. What are the requirements? What do I need? Do they need to have a certain level of income? What is my application missing that I can fill with a cosigner?’“
In that way, when you're looking for a cosigner, you know exactly what to look for, and then have the conversation with the cosigner and explain to them exactly what a cosigner is and then what your plans are in the future,” he adds.
Whether for a primary or secondary mortage in Canada, it’s important to understand all aspects of mortgages in Canada before making a decision to buy. The Brookfield Residential blog has resources and tips that can make your buying experience easier including a list of resources for first-time buyers in Canada and a list of the best places to move in Canada.
If you have questions about buying a new home or what Brookfield Residential communities have to offer, contact one of our home buying experts when you're ready.