7 Risks & Essential Tips For Co-Signing A Loan For Someone With Poor Credit

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Published: January 9th, 2025 • Last Updated: January 9th, 2025
Author: Ross Taylor on AskRoss.ca

P3: What You Need To Know About Cosigning a Mortgage

In Part 2 of our “What You Need To Know About Cosigning a Mortgage” series, we explored the steps to set up a co-signing arrangement with a family member.

But what happens when the person you’re helping has poor credit? The stakes rise significantly. In this article, I’ll offer practical tips for both co-signers and co-signees – I explain the risks, from credit damage to strained relationships and the possibility of legal action.

Stay tuned for the final part of our four-part cosigning series, where we’ll explore how co-signing affects your eligibility for first-time homebuyer incentives in Canada.

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If you missed them, make sure to check parts one and two of our co-signing series:

  1. What Are The Tax Implications of Co-signing a Mortgage in Canada?
  2. What Are The 7 Essential Steps To Take When Co-Signing A Mortgage For A Family Member?

7 Risks of Cosigning a Mortgage with Poor Credit

Co-signing a loan for someone with a poor credit history carries significant risks that should be carefully considered before agreeing to the arrangement. Here are the key risks involved.

1. You are legally responsible for the debt

As a co-signer, you are equally responsible for repaying the entire loan amount if the primary borrower fails to make payments.

This means you could be on the hook for a substantial debt, even if you don’t directly benefit from the loan. This responsibility is true even if you hold only 1% of the property’s title.

Tips for co-signers before you sign:

  1. Be ready to step in if needed
    If the primary borrower misses payments, you must be prepared to take over all payments to protect your credit and financial standing.
  2. Know the lender’s rights
    The lender doesn’t have to chase the borrower first—they can demand full repayment from you immediately if payments are missed.

Best practice tips for co-signers:

  1. Monitor payments
    Ask the lender for monthly statements and payment notifications. This lets you catch any missed payments early and take action.
  2. Get written confirmation from the lender
    Make sure the lender agrees to notify you immediately if any payments are late. It’s your credit on the line too.
  3. Keep records
    Save all loan documents and track payment history. You’ll want a clear paper trail in case of disputes or issues.

Tips for co-signees understanding your responsibilities:

  1. Acknowledge the co-signer’s risk
    Your co-signer is putting their financial stability on the line for you. Treat this arrangement with the seriousness it deserves.
  2. Understand the consequences of missed payments
    Late or missed payments will hurt both your credit and your co-signer’s, potentially damaging their ability to secure loans or credit in the future.
  3. Remember, both parties are liable
    The lender can pursue either you or your co-signer for the full loan amount, so it’s critical to stay on top of payments.

Best practice tips for co-signees:

  1. Set up automatic payments
    Use automated payments to avoid missed deadlines and ensure consistency.
  2. Build an emergency fund
    Save enough to cover at least three months of mortgage payments in case of unexpected financial challenges.
  3. Keep your co-signer in the loop
    Regularly update your co-signer on your financial situation, so they’re not blindsided if issues arise.

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2. Potential damage to your credit score

Late payments or defaults by the primary borrower will be reflected on your credit report, potentially lowering your credit score.

Since the person you’re co-signing for already has poor credit, there’s a higher risk they may miss payments, which would negatively impact your credit.

Preventive measures tips for co-signers:

  1. Get online access to the mortgage account
    Insist on full online access so you can regularly monitor the account and ensure payments are made on time.
  2. Set up payment notifications
    Request automatic alerts from the lender for every payment made—or missed—so you’re always in the loop.
  3. Monitor your credit regularly
    Check your credit report monthly with Equifax or TransUnion. Early detection of missed payments can help minimize the impact on your score.
  4. Keep payment records
    Maintain a detailed record of all payment confirmations. This can help resolve disputes if they arise.

Protection strategies and tips for co-signers:

  1. Draft a payment contingency agreement
    Have a written agreement allowing you to step in and make payments directly if the borrower encounters financial difficulties.
  2. Build an emergency fund
    set aside funds specifically to cover missed payments if needed. This ensures you can step in without straining your own finances.
  3. Use a joint payment account
    Require mortgage payments to be made through a joint account where you can monitor transactions in real-time.
  4. Request credit score updates
    Ask the primary borrower to provide quarterly updates on their credit score. This allows you to track their financial progress and stay ahead of potential issues.

Payment management tips for co-signees:

  1. Automate your payments
    Set up automatic payments to ensure on-time mortgage payments every month. This not only protects your credit but also your co-signer’s.
  2. Maintain a payment buffer
    Keep at least one month’s worth of mortgage payments in your account as a safety net in case of unexpected expenses.
  3. Share proof of payments
    Provide monthly confirmation of payments to your co-signer. This builds trust and ensures transparency.
  4. Communicate challenges immediately
    If you’re facing financial difficulties, let your co-signer know as soon as possible so you can work on a solution together.

Credit improvement plan tips for co-signees:

  1. Rebuild your credit
    Use the co-signed mortgage as an opportunity to improve your credit score by consistently making on-time payments.
  2. Share your progress
    Keep your co-signer informed of your credit score improvements. It shows responsibility and helps maintain trust.
  3. Consider bi-weekly payments
    Making smaller, more frequent payments can help reduce interest and build a positive payment history more quickly.
  4. Stay organized
    Maintain detailed records of payments and any correspondence with the lender. It’s a good habit that protects you and reassures your co-signer.

By working together and staying proactive, co-signers and co-signees can minimize credit risks while fostering trust and accountability.

Remember, a single late payment can drop your credit score significantly and stay on your report for up to seven years.

In my experience, maintaining open communication and having proper monitoring systems in place is crucial for protecting everyone’s credit standing.

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3. You may have difficulty obtaining future credit

When you co-sign a mortgage, that loan becomes your responsibility in the eyes of lenders. It will show up on your credit report and factor into your debt-to-income ratio, even if you’re not making the payments.

This can make securing credit for your own needs—like a car loan, line of credit, or even another mortgage—more difficult. Lenders may see you as overextended or at higher risk, limiting your borrowing options.

Tips for co-signers before co-signing:

  1. Assess the impact on your future borrowing power
    Calculate how adding this debt will affect your ability to qualify for new credit, especially if you have plans for a major purchase like a home or car.
  2. Plan ahead for any upcoming credit needs
    If you anticipate needing a loan or credit line soon, get pre-approved before co-signing. This ensures you secure financing while your debt-to-income ratio is still unaffected.
  3. Consider co-signing for a smaller amount
    If possible, ask the borrower to reduce the mortgage size or make a larger down payment to limit your exposure.

Protecting your borrowing power tips:

  1. Maintain an Excellent Credit Score
    A high credit score can help counteract the perceived risk of additional debt. Focus on timely payments and keeping your credit utilization low.
  2. Avoid Taking on New Debt
    While you’re a co-signer, avoid applying for new credit. The additional inquiries and obligations could reduce your borrowing power further.
  3. Consolidate Existing Debt
    Simplify and reduce your current debts before co-signing. Lowering your overall liabilities will help offset the added responsibility of the mortgage.

Tips for co-signees managing their responsibilities:

  1. Commit to a refinancing plan
    Work with your co-signer to create a timeline for refinancing the mortgage into your name. This will release them from their financial obligation.
  2. Improve your credit score quickly
    Take deliberate steps to raise your credit score by paying down debts, maintaining low balances, and staying on top of payments.
  3. Keep your debt-to-income ratio low
    Avoid additional loans or high-interest credit cards. Focus on paying down your existing obligations and documenting any income increases.

Building independent credit tips for co-signees:

  1. Set clear credit goals
    Establish specific credit score targets and timelines to make refinancing feasible sooner rather than later.
  2. Use tools to build credit
    Consider a secured credit card or low-limit credit products to create a positive payment history and strengthen your credit file.
  3. Save for refinancing costs
    Aggressively save for a refinance down payment to increase your borrowing power and reduce the lender’s risk when the time comes.

Remember, as your mortgage broker, I’ve seen how co-signing can impact future borrowing capacity.

A $300,000 mortgage co-signing commitment could reduce your future borrowing power by $100,000 or more, even if you’re not making the payments. Plan accordingly and always maintain a financial buffer.

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4. Potential strained personal relationships with your co-signee

Co-signing a mortgage isn’t just a financial arrangement—it’s a test of your personal relationship. If the borrower struggles financially and you’re forced to take over payments, it can lead to frustration, resentment, and tension.

Money matters have a way of straining even the strongest friendships and family bonds. The key to avoiding this is clear communication, well-defined boundaries, and treating the arrangement like a business deal.

Setting clear boundaries tips for co-signers:

  1. Have an honest conversation upfront
    Discuss financial expectations, payment plans, and what happens if the borrower runs into trouble. Transparency from the start can prevent misunderstandings later.
  2. Create a written agreement
    Beyond the loan documents, draft a separate agreement outlining responsibilities, communication expectations, and consequences for missed payments.
  3. Schedule regular check-ins
    Set up periodic meetings to review the borrower’s financial health and payment status. These conversations should be planned and neutral to avoid emotional conflict.
  4. Define consequences for missed payments
    Clearly outline what will happen if the borrower defaults, such as taking over the property or requiring repayment through other means.

Protecting the relationship tips for co-signers:

  1. Keep money talks professional
    Treat financial discussions like a business meeting—focused and to the point. Avoid mixing these talks with family gatherings or personal interactions.
  2. Use written communication for clarity
    Maintain written records of all agreements and discussions. This avoids any misunderstandings and ensures everyone is on the same page.
  3. Consider a mediator
    If tensions rise, involve a neutral third party to mediate financial discussions. This can help preserve your personal relationship while resolving disagreements.

Maintaining Trust tips for co-signees:

  1. Be transparent about your finances
    Share your financial situation honestly, both before and during the mortgage term. If problems arise, communicate them immediately.
  2. Proactively update your co-signer
    Don’t make your co-signer chase you for updates. Regularly provide payment confirmations and updates on your financial progress.
  3. Show gratitude
    Acknowledge the significant risk your co-signer has taken for you. A simple thank-you goes a long way in maintaining goodwill.

Professional communication tips for co-signees:

  1. Keep money separate from personal life
    Avoid letting financial discussions spill into family dinners or casual get-togethers. Schedule separate times to discuss the mortgage.
  2. Document everything
    Provide written payment confirmations and keep records of all communications regarding the mortgage. This shows you’re taking the arrangement seriously.
  3. Own up to mistakes
    If you make a financial misstep, take full responsibility and communicate your plan to fix it. Accountability strengthens trust.
  4. Follow through on promises
    Whether it’s sticking to a payment plan or sharing financial updates, always follow through. Reliability will ease your co-signer’s concerns.

In my experience, successful co-signing arrangements hinge on treating the mortgage like a business deal.

Money and relationships can mix, but only when both parties set clear boundaries, communicate openly, and prioritize trust and respect.

Done right, you can protect both your finances and your relationship.

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5. You have limited control over the debt

As a co-signer, you typically have no control over how the loan funds are used, even though you’re fully responsible for the debt.

The borrower may make poor financial decisions, which inherently increases the likelihood of default.

Here are my recommended tips for both parties to manage this challenging aspect of co-signing.

Tips for co-signers to establish control measures:

  1. Request access to payment records
    Ensure you have direct access to mortgage statements and payment history. This allows you to monitor payments and address potential issues early.
  2. Add conditions to your agreement
    Draft a co-signing agreement that includes conditions like maintaining a minimum credit score or avoiding additional debt without consulting you.
  3. Schedule regular financial check-ins
    Set up regular meetings to review the borrower’s financial health, payment history, and any property-related expenses.
  4. Retain the right to make payments
    Include a clause in the agreement that allows you to make payments directly to the lender if necessary. This protects your credit if the borrower runs into trouble.

Protect your interest tips for co-signers:

  1. Request partial property ownership
    If possible, include your name on the property title. This ensures you have a say in major decisions and protects your investment.
  2. Require financial updates
    Ask the borrower to provide quarterly updates on their financial situation. This keeps you informed and helps identify issues early.
  3. Set guidelines for property maintenance
    Agree on clear standards for property upkeep. Poor maintenance can lower the property’s value and increase financial risk.
  4. Include input on major decisions
    Add a clause requiring your consent for significant financial decisions, such as refinancing, renovations, or renting out the property.

Building trust tips for co-signees:

  1. Share financial information voluntarily
    Proactively provide monthly bank statements and payment confirmations. Transparency builds trust and keeps your co-signer at ease.
  2. Communicate major decisions in advance
    Notify your co-signer before making big financial moves, like taking on new debt or making large purchases.
  3. Document property expenses
    Keep detailed records of all property-related costs, such as repairs, taxes, and utilities. This demonstrates responsibility and ensures clarity.
  4. Stay open about your finances
    Maintain honest and regular communication about your financial health. Don’t wait until problems arise to have these discussions.

Responsible management tips for co-signee

  1. Create and share a budget
    Draft a detailed budget that prioritizes mortgage payments and share it with your co-signer. This shows you’re serious about financial responsibility.
  2. Avoid additional debt
    Don’t take on new loans or credit without discussing it with your co-signer. Additional liabilities can increase the risk of default.
  3. Maintain adequate insurance
    Ensure the property is fully insured to protect both parties’ investment in case of emergencies or unexpected events.
  4. Document home improvements
    Keep a record of all maintenance and upgrades to demonstrate good stewardship of the property and protect its value.

Remember, while you can’t control every aspect of the loan, establishing clear guidelines and maintaining open communication can help prevent many common issues.

The most successful co-signing arrangements are those where both parties work as partners rather than just guarantors and borrowers.

By working together, both parties can protect their interests and avoid unnecessary tension.

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In a worst-case scenario where the borrower defaults, the lender could sue you and go after your personal assets to recover the debt. If you put up collateral like your car or home to secure the loan, those assets are also at risk.

Protecting yourself starts with understanding these risks and taking proactive steps to minimize exposure.

  1. Consult a lawyer before signing
    Have all documents reviewed by a legal professional to fully understand the implications and ensure there are no hidden risks?
  2. Draft a separate agreement
    Beyond the lender’s paperwork, create a legal agreement with the borrower outlining their responsibilities and your rights in case of default.
  3. Require life insurance coverage
    Ask the borrower to maintain life insurance with you as the beneficiary to cover the mortgage in case of their death.
  4. Keep financial records
    Document every transaction related to the loan, including agreements, payments, and communications. This can be invaluable in case of disputes.

Asset protection tips for co-signers:

  1. Avoid using your primary residence as collateral
    Do not risk your own home for the loan. Explore alternatives or consider declining the request if collateral is required.
  2. Separate finances from the borrower
    Maintain distinct bank accounts and financial independence from the borrower to protect your assets from potential claims.
  3. Use a trust for high-value assets
    Consider placing valuable assets in a trust, shielding them from legal claims linked to the co-signed loan.
  4. Build a dedicated emergency fund
    Set aside funds specifically to cover payments in case of borrower default. This can help you avoid legal actions and asset loss.

Default prevention tips for co-signees:

  1. Build strong emergency savings
    Maintain a savings account large enough to cover several months of mortgage payments to avoid missing payments.
  2. Get a mortgage life insurance
    Protect your co-signer by securing mortgage life insurance, ensuring the loan is paid off in the event of your death.
  3. Keep payment records
    Document every payment you make. This transparency reassures your co-signer and protects you from disputes.
  4. Communicate financial challenges immediately
    If you foresee payment difficulties, inform your co-signer early so you can work together on a solution.
  1. Prioritize protecting your co-signer’s assets
    Recognize the significant risk your co-signer is taking. Take steps to ensure their assets are never at risk due to your financial challenges.
  2. Develop a worst-case plan
    Work with your co-signer to create a written plan for handling defaults, including repayment strategies or asset protection measures.
  3. Maintain property insurance
    Ensure the home has adequate insurance coverage to safeguard against unexpected damages or liabilities.
  4. Consider disability insurance
    If you’re unable to work due to illness or injury, disability insurance can help you keep up with mortgage payments and protect your co-signer.

Legal action is more than a financial risk—it can destroy relationships and long-term financial stability.

From my experience, the best way to protect everyone involved is through prevention: clear agreements, financial safeguards, and open communication. When both parties are proactive, the likelihood of legal action or asset loss drops significantly.

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7. It is a long-term commitment

Co-signing often involves a long-term commitment, as mortgage loans typically have terms of three to five years. During this period, your financial situation and relationship with the borrower may change, but you’ll still be liable for the debt.

Co-signing a mortgage isn’t a short-term favour—it’s a multi-year financial obligation. Most mortgage terms range from three to five years, but the impact on your finances and credit can last much longer.

Over that time, your personal circumstances or relationship with the borrower may shift, but your responsibility for the debt remains unchanged. Planning for the long term and ensuring both parties work toward independence is key to a successful co-signing arrangement.

Long-term planning tips for co-signers:

  1. Create an Exit Strategy Before Signing
    Decide upfront how and when you’ll remove yourself from the mortgage. This could involve refinancing, selling the property, or setting credit improvement milestones for the borrower.
  2. Plan for life changes
    Consider how major life events—like retirement, marriage, or having children—could impact your ability to manage this commitment. Adjust your financial plans accordingly.
  3. Review and adjust annually
    Schedule yearly reviews of the arrangement. This allows you to assess progress, address any concerns, and make adjustments as needed.
  4. Stay focused on your financial goals
    Don’t let the co-signed mortgage derail your own plans for retirement, investments, or other goals. Keep your finances on track while managing this obligation.

Protection strategies and tips for co-signers:

  1. Include refinancing requirements
    Make it clear in your agreement that the borrower must work toward refinancing the mortgage to remove your name after a certain period or once specific credit milestones are met.
  2. Set milestones for credit improvement
    Work with the borrower to set clear, achievable goals for improving their credit and financial stability during the term.
  3. Maintain a dedicated emergency fund
    Keep a financial buffer available for the duration of the loan. This ensures you can cover unexpected issues without compromising your own stability.
  4. Schedule regular financial reviews
    Plan periodic check-ins to discuss progress, financial updates, and any necessary adjustments to the arrangement.

Building independence tips for co-signees:

  1. Set a timeline for taking over the mortgage
    Commit to a clear plan for assuming the mortgage on your own, whether through refinancing or credit improvement.
  2. Work toward credit goals
    Establish and meet specific credit score targets to qualify for refinancing or new financial opportunities.
  3. Save for a future down payment
    Consistently set aside funds to contribute toward refinancing costs or reducing the mortgage balance.
  4. Increase your income
    Explore opportunities to boost your income, whether through career growth, side gigs, or other avenues. This can help you take financial responsibility sooner.

Commitment management tips for co-signers:

  1. Provide regular updates
    Keep your co-signer informed about your progress on credit improvements and other financial milestones. Transparency builds trust.
  2. Hit all agreed milestones
    Stay accountable to any financial or credit goals outlined in your agreement with the co-signer.
  3. Document improvements
    Keep detailed records of your financial progress, including savings, credit score increases, and income growth.
  4. Seek professional guidance if needed
    If you’re struggling to meet your goals, consider working with a credit counsellor or financial advisor.

A lot can change over several years, both financially and personally. The best co-signing arrangements are those where both parties recognize the temporary nature of the commitment and actively work toward independence for the borrower.

Advice from Ross Taylor Mortgages

Co-signing a mortgage is a significant financial commitment, but with the right preparation and communication, it can also be a rewarding way to help a loved one achieve their dream of homeownership.

By setting clear expectations and taking proactive steps, you can protect your own financial well-being while giving them the support they need to succeed.

At Ross Taylor Mortgages, we specialize in helping Canadians navigate the complexities of co-signing arrangements.

If you’re considering co-signing and want to ensure you’re making an informed decision, don’t hesitate to reach out to us for personalized advice. We’re here to guide you every step of the way.

And don’t miss the final part of our four-part “What You Need to Know: Co-signing a Mortgage” series! In it, we’ll explore how co-signing impacts eligibility for Canada’s first-time homebuyer incentives—a critical read for anyone planning to co-sign in today’s housing market. Stay tuned!

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