Using a co-signer to qualify for a mortgage

These days, getting enough money together to buy your first home isn’t easy. With record prices, higher interest rates and strict stress tests, how do you qualify for a mortgage that will let you buy the property you want? Bringing in a co-signer is one way to get a bigger loan or move past a less-than-stellar credit history. 

“Adding a co-signer can be a good thing right now,” says James Harrison, Mortgage Broker at Mortgages.ca. “With higher rates, the stress test means buyers now have to qualify for a rate in the 7%+ range.” 

So what is co-signing, exactly? 

Basically, it’s getting your parents or your siblings or someone else close to you to add their financial clout to your application. So instead of having to qualify based on your income (and that of your partner, if you have one) alone, you have an extra income or two backing you up.

The co-signer promises to make payments if you can’t, reducing risk for the lender and enabling you to qualify for an amount you wouldn’t be able to get otherwise. And while their name is on all the mortgage docs, they don’t have ownership rights. Those are yours. (A joint ownership agreement is when you’re actually co-owners – it’s more common when two parties are planning to share a home.) 

Not all co-signers are created equal. 

Your parents retired last year and their home is paid off. Sounds perfect, right? Not really. Lenders don’t look at how much equity you have: they want to see regular income. Or maybe your older brother just got a high-paying job but wasn’t always great with paying bills. Also no. Or your dad, who has a great income, just bought a house and has a significant mortgage to pay off. No again. 

“Lenders want to see good income, stellar credit and low debt,” says Harrison. “A lot of people think adding their parents as co-signers will make it a slam dunk because they own a house free and clear that’s worth $2 or 3 million. But if they’re retired with minimal income, the equity doesn’t actually help much. Being a good candidate for co-signing is all about income, not assets.” 

And remember that while you’re adding their income to yours, you’re also adding their liabilities. That means their own mortgage (or mortgages), property taxes, condo fees, car payments, credit card debt, you name it reduce their borrowing power. And if they don’t have the best credit score, that’s also a factor. 

Co-signers are taking a big financial risk.

They are 100% liable for your mortgage if you don’t pay. That’s why these types of mortgages tend to be between family members. Getting a co-signer on board isn’t about getting them to pay, it’s about using them to qualify for a bigger loan that YOU can afford to pay every month. They should go in confident of that. 

Many mortgage professionals recommend putting together a contract between the two parties that specifies that the primary owners must repay the co-signers in the event that they do end up having to pay. You may also want to get life or disability insurance in case someone gets sick or passes away. 

A co-signer can be removed once the main applicants qualify on their own. 

Co-signing can be a long-term commitment – most mortgages have amortizations of 25-30 years. But your co-signers don’t actually have to be on the title for that long. If your income goes up or interest rates drop, you can remove them. All it takes is a change to the title (called a release of covenant). And there’s no need to break the mortgage in this situation, so it will cost you nothing to make the change.