Lenders aren’t exactly adrenaline junkies who enjoy taking risks and handing out money to every applicant. Rather, they prefer to play it as safe as possible, using credit checks, debt-to-income ratios, and a whole host of other methods to determine the chances you will pay back a loan on time and in full. Having a second person to sign and hold responsibility in case you default can improve the probability you’ll be approved. That being said, just because having a co-signer is more desirable from a lender perspective, doesn’t necessarily mean it will be right for you. Here are a few important factors to take into consideration to determine if you should co-sign your mortgage.
There are a couple of different forms that co-signing can take. The first is when the co-signer is also the co-borrower. Think of a partner or spouse whose names are also put on the title of the home. The other is when the co-signer plays more of a guarantor role. They are only responsible for the loan if it goes into default. Either way, a co-signer will need to have a strong credit score and healthy finances to be seen as a benefit.
Co-signers take on considerable risk when they add their name to your paperwork. Here are a few ways they will be impacted:
- If you default and stop making payments, your co-signer is responsible for the loan. This is true even in situations where they don’t live in the house at all.
- They will experience a hit to their own credit score. Just as you will drop a few points when undergoing a hard credit check and taking out a large loan, so too will your co-signer. That means they may have to wait until their score recovers to apply for their own big purchases like vehicle loans or mortgages.
- Money problems can easily kill a relationship flat out. Whether it’s your best friend, your mom, or the love of your life, you and your co-signer should be very comfortable having hard conversations. Otherwise, there’s a good chance you could ruin something very beautiful.
Play it Safe
This isn’t to say that you should never co-sign or have someone co-sign for you. What this does mean is that you should put some safeguards into place before putting someone you care about on the line for your loan. For starters, your co-signer should be a part of the loan conversation from the very start. They should have access to all the paperwork and contracts so that they are truly aware of what they are getting involved in. Let them review their options and the conditions under which they can be released from the loan. In addition to this, you two (or three, or four!) should sit down and put a written plan into place about how you will communicate about this responsibility. For example, if you happen to miss a payment, how do you plan on letting your co-signer know in case the lender reaches out to them? This is a great situation to hope for the best but prepare for the worst.
Alternatives to a Co-Signer
If you can’t find someone to co-sign your mortgage or just don’t want to put a loved one in a position of risk, there are alternatives. Work with a mortgage broker, like the ones on our Calgary-based team, to help you explore different lenders that may consider your application without having to submit it multiple times. You can also just wait until you have repaired your damaged credit score, built a larger savings account to put down, or generally resolve whatever it is that is making lenders reluctant to work with you.
Assess your options with one of our friendly and professional mortgage brokers, send us a message here or give us a call at 587-609-5558.