Co-signer or Guarantor? What is the difference? How can they help? Here is our FAQ on the subject.
So, you would like to purchase a home, but you find yourself in a situation where you don’t quite qualify on your own. Perhaps you are: self-employed; or in a new line of work; or a new geographic location; or are a freshly graduated student carrying student loan debt with limited assets. Whatever the reason, if you don’t meet the lenders’ qualifying guidelines, what can you do? A possible solution is asking a family member to be a co-signer or a guarantor.
What is involved if they co-sign?
Adding a co-signer means that they will go on title with you and will sign the mortgage as a co-borrower. In many situations, the family member(s) can go on with 1% ownership. The lenders are satisfied with this arrangement because as long as the co-signer is on title, the banks’ interests are protected. Lenders take the view that the new mortgage liability is “joint and several” meaning that each person on the title is 100% responsible for the repayment of the mortgage.
A guarantor is someone who signs the mortgage with the main applicant, but does not go on title. Whether or not the bank requires the person to be a co-borrower or a guarantor will depend on the lender and each individual situation.
The benefit of being a guarantor is that it is easier to change the mortgage in the future without having to change any names on the title. Addtionally worth noting, is that a guarantor is different from a covenantor. A guarantor’s liability is secondary to that of the party whose obligation he is guaranteeing; a covenator’s liability is primary.
From a risk management perspective, the banks prefer having a co-borrower rather than a guarantor or covenantor.
Once the mortgage has funded, if there are situations that arise in the future where the main borrower has difficulty making the mortgage payments, the bank will ask the co-borrower to step in and take over making the payments until such time as the property is either sold, or the main borrower is able to resume making the regular payments again.
Something of importance to note is that starting in 2024, CRA may view situations where parents have co-signed for their children, or vice versa, a “Bare Trust” requiring a T3 Trust Income Tax and Information Return to be filed. It is important to discuss this with an accountant if you are planning to co-sign for your children, or if children have been added to a parents’ title for estate planning or mortgage qualifying purposes. Here is the CRA post regarding the subject, and here is a Globe and Mail article that also discusses.
What is required?
Whoever has agreed to co-sign will have to fill out an application, consent to a credit check, and provide all the usual supporting documents that are required with a mortgage application such as employment confirmation, asset verification, and any other documents required to verify their application details. Their signatures will be required on all of the legal documents at closing.
Can the co-signer or guarantor be removed at a later date?
Once the main borrower can demonstrate to the bank that they are able to qualify on their own, they can apply to formally have the co-signer or guarantor removed. There is no set time frame for when this can happen. When the time is right, an application just in the name of the main borrower is approved, and documents are prepared by the bank. If there is a name change involved with the title, there will be some additional signing at a lawyer or notary’s office. Click here for our information post regarding Title Changes.
Will this impact the co-signer’s ability to qualify for other borrowing?
Yes. The co-signer or guarantor will have to declare that they have signed on this mortgage when they are applying for future credit in their own name(s). The payments associated with the co-signed property will be factored in to their debt servicing which include: mortgage payment, property taxes, and strata fees.
If you are in a situation where you are considering asking someone to co-sign, or you have been approached to co-sign, there are two other professionals that should be consulted prior to making the big decision: an accountant to check for any tax implications; and a lawyer or notary to review any estate related considerations.
Having a co-signer can be a big help when you can’t quite meet the banks’ lending guidelines. In the right circumstances, it can be the critical key to getting into home ownership.
Curious to see how you qualify? Click here for the online application to start the process for pre-approval.