The Myths About Co-signing for a Mortgage

With housing so expensive in Greater Toronto and Greater Vancouver, some buyers need assistance to qualify for a mortgage. The topic of co-signing comes up frequently; and most often it involves an immediate family member.

People are often disappointed though when the result does not change, even with an apparently strong co-signer. Why is that?

“But Ross, she has a really good job, what’s the problem?” or “Ross my dad is a pensioner, but he only has a very small mortgage on his home – so he must be a great candidate, right?”

Okay, so here’s the deal.

When you bring someone else to your mortgage application, you don’t get to cherry-pick their best attributes and suppress the rest. Your mortgage lender is going to look at your co-signer the EXACT SAME WAY they look at you.

  • What is their income and employment?
  • What are their current housing financial obligations? (Rent or mortgage, taxes and utilities)
  • What other monthly obligations do they have? (Loans, leases, credit cards etc.)
  • And how responsible are they with managing credit. (A review of their personal credit history)

Example One

Co-signer has a terrific job making $90,000 per year, and together with her husband owns a million dollar home with a $60,000 mortgage. What could be simpler?

  • She wants to pay off her mortgage really quickly, so her actual mortgage payments are very large, relative to the loan amount
  • She has co-signed for a student line of credit for one of her children
  • She has a normal looking balance on her credit card and a reasonable car payment
  • Her property taxes are over $5,000 per year

This one was actually touch and go. The co-signer had a net worth of more than one million dollars; a tiny mortgage, a great job and a monster credit score. And still we had to pay off the student line of credit to make it all work. APPROVED!

Example Two

Our buyer’s father owns his home in Mississauga and has a small mortgage of less than $100,000. He is retired, and relies on CPP and OAS primarily for income. He is doing fine, but factor in his mortgage payment, his property taxes, heating cost  and a modest car payment and dad did not help the application at all unfortunately. DECLINED!

Example Three

The lady co-applicant works on an assembly line ten years making $25 per hour. She and her husband own a nice home in Vaughan with more than $500,000 in equity built up in seven short years. Her mortgage balance is less than $300,000 and she leases a Honda Civic and has great credit. DECLINED!

Our buyer asked me if this lady as a co-signer would help his application, as his hourly wage is not enough on his own to qualify for a mortgage.

The answer was no – you see the pattern. Even though she is joint on the mortgage on her home, each of them are individually fully responsible for the mortgage and as such their full mortgage payment, taxes and heating cost factor into the review.

Her additional income was not enough to help our buyer with a $450,000 mortgage – because of what she already brings to the table.

Lessons Learned

If you are thinking of bringing a co-signer in to help you qualify for a mortgage, make sure your mortgage broker vets the co-applicant really well – to avoid disappointment down the road.

For mortgage qualification purposes, it’s all about income and living expenses, and less about net worth, savings and general financial health. That is because the days of so called “equity lending” have all but disappeared.

And of course, your co-applicant must also bring a decent credit score to the party!

 
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