Tighter lending rules and more expensive real estate have resulted in many people being unable to qualify for a mortgage on their own. You could have good credit and a decent income and still not meet the tighter rules. One of the solutions is seeking a co-signer. This has its benefits, but it also comes with risks. We’ll outline both the risks and benefits before sharing tips to minimize the risk for everyone involved.
The Benefits of a Co-Signer
If you are on the edge of qualifying in terms of income or credit score, a co-signer will boost your application. It will dramatically increase your odds of securing a Grande Prairie mortgage and getting one with favorable loan terms.
A co-signer’s good credit will offset your bad credit. Their strong financial sitaution could offset your irregular income. In this regard, a good co-signer could make up for your own shortcomings.
The Risks of a Co-Signer
A co-signer may be a guarantor, someone who promises to pay the loan payments if you can’t. Or the co-signer may be a co-owner of the Grande Prairie property, receiving a stake in the home in exchange for being equally liable for the payments. The obvious risk for co-signers in both cases is that they may have to make your house payment when you can’t. If they cannot or will not make the house payment, you could lose your home.
How to Mitigate the Risks of Co-Signing
A co-signer could require the home buyer to take out disability insurance and life insurance. The disability insurance will aid with the house payments when the owner can’t make them. Life insurance will pay off the debt if the home buyer dies.
A co-signer could be a co-borrower or a guarantor of the Grande Prairie mortgage. Learn whether or not the mortgage lender will allow someone to be a guarantor before you ask someone to become a guarantor. Alternatively, you could talk to a Grande Prairie mortgage broker to find a lender who will allow someone to be a guarantor.
A co-borrower is responsible for the loan and has an equity stake in the house. The co-signor must discuss this with their accountant and lawyer before co-signing to avoid tax and estate planning problems.
A co-signer should be given copies of all paperwork and allowed to review it at their leisure. Discuss the impact of co-signing with an accountant and solicitor.
When both people’s names are on the loan, one person failing to make the payments hurts the credit of both. Discuss how you’ll minimize the risk of one person missing a house payment that doesn’t cause the other harm. It is reasonable for the co-signer to ask for your credit report and payment history to make sure you won’t hurt their credit with repeated late house payments.
Discuss when the home buyer could refinance the loan to remove the co-signer. This may be an option in a few years when the borrower’s credit improves. Be clear regarding expectations instead of making assumptions.
How to Avoid Mistakes when Co-Signing a Loan
Educate yourself before you ask someone to co-sign. For example, a co-signer’s existing home equity can’t be used to save your house. A relative living off retirement benefits may have a decent net worth, but unless they have a large pile of cash, that doesn’t mean they can pay your home loan.
The co-signer’s credit and payment history are scrutinized as heavily as the borrower’s. Before you ask someone to co-sign, review their financial situation. Verify that they can make the payments if necessary and would pass the application process. This saves everyone time and avoids the embarrasment of being rejected.
You don’t have an obligation to co-sign someone’s loan, just as there is no obligation to loan them money.
If you are asking someone to co-sign a loan, don’t pressure them or guilt-trip them. Be appreciative. Furthermore, you should be careful who you ask to co-sign the loan. Your home is on the line if they cannot or will not pay the payments.
Talk to Grande Prairie Whalen Mortgages about the impact of having a co-signer. For example, you may not be eligible for first-time homeowner tax breaks if you have a co-signer who has a stake in the property. This could affect your taxes and the overall costs associated with closing and owning the home.