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Things to Consider Before Co-Signing a Mortgage

23 December, 2011 / by marketing

On Monday we began our mini-series about co-signers and mortgages in Canada. While we covered who they were, what they do, and how they can be a great help to home buyers, there are still a few things you need to consider if you’re considering being a co-signer for someone’s mortgage. Most of these revolve around the fact that if the applicant defaults on the loan, you’re going to be responsible to pay it back. And while most co-signers go into the agreement understand that, they don’t really consider what that means.

Being responsible to pay the loan should the applicant default isn’t a “what if” situation. It’s a very real thing that could happen and if it does, the lender is going to come to you for the money. What’s more, and what many co-signers don’t realize, is that it doesn’t matter why the person defaults on the loan or misses payment. Even if the original applicant declares bankruptcy and so, is free from all debts, you still will not be and your name is still on those loan papers. If the loan is defaulted on for any reason, you will need to pay it back. This is why it’s so important to calculate the numbers and work out if you can actually afford to take on that loan. While you might never need it, you do need to have the money there if you need it.

A huge consideration to think about when co-signing a loan with someone is that your name is actually on the mortgage, which means that you, as well as they, are taking on more debt. This could have a huge effect on your credit score and you need to think about what that affect will be. If you’re going to apply for a loan of your own anytime soon, it could affect your ability to be approved for that loan. And if you’ve just rebuilt your credit for yourself, you probably don’t want to take on the risk of having someone else be responsible for it.

It’s not all dire, though. As we covered in the first part of the mini-series, co-signing for a loan can be a great feeling for co-singers, and can definitely help people out when they need it most. And, as a co-signer, there are things you can do to help yourself and give yourself some reassurance that you’re not headed down a bad path.

Ask the lender to notify you if the applicant defaults on any payment. Not all lenders will do this unless you ask, and make a point of asking. If the loan defaults for one day, you need to know about it so you can rectify it as soon as possible, even if it means paying the loan that month just to save your credit. In addition to this, also make sure that you have a copy of everything and anything pertaining to the mortgage. Again, and it really can’t be stressed enough, your name is going to be on the mortgage. And because of that, you need to know everything that’s been documented about it.

As we said, co-signing is not a bad thing, and it’s a common practice for spouses to help each other, or parents to help their children who are just starting out. The best protection you have when co-signing a loan is to speak to a Toronto mortgage broker who can guide you through the process and fully explain the process of co-signing for a loan, something that we’ll cover on Monday in our third part of our cosigning mini-series. ”