What Are the Mortgage Co-Signer Requirements in Canada?
Getting a mortgage can be difficult for many Canadians, especially those with a low credit score. If you’re in this situation, you may consider having someone co-sign the loan with you, which could potentially make it easier to get approved. In this article, we’ll explore what co-signing is and discuss some of the benefits and considerations that come along with it when obtaining a mortgage in Canada.
What is Co-Signing?
Co-signing is an agreement between two parties where one party will agree to sign the mortgage loan agreement and become responsible for repayment in case the primary borrower can’t make their payments on time (or at all.) The co-signer’s credit score must be good and they need to have financial stability so they can take over the payments if the borrower defaults.
It goes without saying that taking on this responsibility should not be done lightly; both parties involved in the agreement are legally responsible for each other’s actions and should thoroughly understand their rights and obligations before signing any paperwork. It could be a good idea to use the services of a real estate lawyer to help with this.
It goes without saying that taking on this responsibility should not be done lightly; both parties involved in the agreement are legally responsible for each other’s actions and should thoroughly understand their rights and obligations before signing any paperwork.
Two key things to understand:
- a mortgage co-signer is different from a mortgage guarantor. The co-signer is added to both the mortgage and the title, while a guarantor is just on the mortgage.
- you should definitely seek independent legal advice to ensure both parties are happy with the contract. This could be your real estate lawyer if you already have one.
What Are The Differences Between A Cosigner, A Mortgage Guarantor And A Mortgage Co-Borrower?
When it comes to mortgages in Canada, there are three different ways you can use a cosigner: as a cosigner, a mortgage guarantor or co-borrower. Each of these roles involves different levels of responsibility and risk for the parties involved.
Cosigner
A cosigner is someone who agrees to take on the responsibility of paying back the loan if the primary borrower defaults. A cosigner’s name will be on the mortgage application and the title, and will usually be considered a part-owner of the home.
Mortgage Guarantor
A mortgage guarantor will also ensure that the borrower makes their payments, but they don’t sign the mortgage application or have their name on the title. This position is mostly used by people with stronger financial credentials who want to boost their credit score even higher.
Co-Borrower
A co-borrower is like a cosigner, in that they’re responsible for the loan and their name is on the title. But unlike a cosigner, they will have rights to the property and are considered joint owners of the home. A co-borrower will also need to go through the mortgage application process and the stress test.
| Name on Title/Mortgage Application | Guarantee The Borrower’s Payments | Have An Ownership Stake In The Home | |
| Cosigner | Yes | Yes | Yes |
| Guarantor | No | Yes | No |
| Co-Borrower | Yes | Split Payments | Yes |
What Are The Benefits of Having a Mortgage Co-Signer?
While there are certain risks associated with co-signing a loan, there are also many potential benefits. Primarily, it gives access to more financing opportunities to a primary applicant who doesn’t have strong enough credit scores to qualify on their own.
Additionally, timely payments made by both parties can help improve both of their credit scores over time and open up potential opportunities to negotiate lower interest rates due to increased security of the mortgage agreement.
Who Can Co-Sign A Mortgage?
For the most part, there are no rules about who can be a co-signer. The co-signer doesn’t have to be a family member or relative. In theory, your co-signer could be your best friend, your neighbour, or even your fifth-grade teacher!
Realistically, though, parents, siblings, or other close relatives are the people most likely to be willing to co-sign. Co-signing a mortgage can be risky, and no one wants to take that risk for a casual acquaintance.
One thing to note: if your choice for a co-signer is someone who would benefit financially from the loan going through, they can NOT be your co-signer.
What Does A Lender Look For In A Co-Signer?
Before a lender will approve you for a loan with a co-signer, they’ll want to make sure your co-signer meets certain criteria. The most important of these is an excellent credit history. Generally speaking, lenders prefer co-signers who have a credit report score in the 700s or higher. It’s a good idea to pull credit reports for both parties beforehand, so you know what to expect.
Your co-signer must also have a steady income and be able to demonstrate that they can afford to make the mortgage payments if you can’t. In other words, your co-signer’s debt-to-income ratio needs to be within acceptable limits.
Finally, lenders may want to see proof of employment or other reliable financial records from your co-signer to demonstrate that they are capable of covering the loan payments if necessary.
Co-Signers and Mortgage Insurance
When home buyers have less than 20 percent available for a down payment, they are required to have mortgage insurance. This is a small cost added onto the monthly loan repayment that ensures the bank against defaults on the mortgage.
This is important because in 2014, CMHC instituted restrictions on mortgage insurance. Now, a person can only have mortgage insurance on one property. If the co-signer you’re considering has mortgage insurance (not homeowners’ insurance) on their own home, they won’t be able to qualify to co-sign for another mortgage that requires it.
In this case, you have two options: have a large enough down payment so you don’t need mortgage insurance or find a different co-signer.
Note: If co-signer already has a CMHC insured mortgage, there are options to go with two other insurers (Sagen & Canada Guaranty).
It Doesn’t Have to Be 50/50
Every situation is different – if you have a great credit history but you’re just under the mark, your co-signer would only need to add an extra 5 – 10% to help you qualify. To the bank, there is no difference between you as the primary borrower and the co-borrower. The bank will treat you both the same.
What if Something Happens To Your Co-Signer?
If your co-signer passes away, goes bankrupt or is otherwise unable to help from a financial standpoint, your mortgage won’t automatically be rescinded. But it also doesn’t mean that you’re out of the woods when it comes to repayment.
Depending on the terms of your mortgage, your lender may want to revisit the terms or shift the burden to your co-signer’s estate. Most mortgages have clauses to protect against these unforeseen changes, so it’s best to ask your lender to clarify what happens when something unexpected takes place.
Protect Yourself With an Enforceable Contract
Sometimes the exact nature of a co-signer agreement isn’t sufficient for the parties involved. If that’s the case, mortgage co-signer requirements in Canada allow you to create an enforceable contract between the debtor and your co-signer. The contract should stipulate who pays what, who occupies the property and who maintains it, as well as what would happen in the event of a dispute or if one party wants out.
When looking into obtaining a mortgage in Canada, having someone co-sign a mortgage can be advantageous but also carries some risk. Ultimately, it’s best to weigh all the options thoroughly before making any decisions about whether or not to commit to co-signing or becoming a co-signer on another person’s mortgage application – seek professional advice first!
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