Co-signing a loan may seem like an easy way to help out a loved one (child, family member, good friend, etc.) In todays market conditions, a co-signor can offer a solution to overcome the high market prices and stress testing measures that are now in place for Canadian borrowers. For example, for borrower with an imperfect credit score, or nor enough income to qualify, adding a co-signor can satisfy a lenders need to lessen the risk associated with providing you with the funding. However, when becoming a co-signer there are a few considerations you should pay attention to.
- If you act as a co-signor or guarantor, you are entrusting your entire credit history to the borrowers. What that means is, late (or missed) payments not only hurts them, but it will also impact you.
- Understand that your current situation-taxes, legal and estate. Co-signing is a large obligation that can hurt you financially if the primary borrower cannot or will not pay
- Try to understand upfront how many years the co-borrower agreement will be in place and understand what changes can be made mid-term if the borrower becomes able to assume the original mortgage on their own.
- Consider the implications this will have regarding your personal income taxes. You may have to pay capital gains taxes in some situations – its wise to talk to an accountant prior to signing on the dotted line.
- Co-signors should seek independent legal advice to ensure they fully understand their rights, obligations and implications. You need to be aware that your credit will be tied up for the entire amount you have co-signed for, as if you are the primary borrower. If you have plans of your own that will require a loan or mortgage, even re-financing your own home, they could be seriously affected. Reach out to a mortgage professional to determine how much this will impact our future plans.
- Carefully think about the character and stability of the people you are being asked to co-sign for. Do you entirely trust them? Are you really aware of their financial situation (and the behavior that may have put them in the position of needing a co-signor)? If lenders consider them too risky to deal with, it may be well advised to seriously consider your own financial well being . “Hope for the best and prepare for the worst” is great advice to follow here!
Co-Signing for a loan is a large responsibility, but if its set up correctly and all options are considered, it can be an excellent way to help a family member, child or friend reach their dream of home-ownership. If you are considering becoming a co-signor or wondering if you will require a co-signor yourself, give me a call. I can refer you to an experienced mortgage professional for current informed advice, and to help guide you through the process.