In times of a hot real estate market often family members want to help any way they can to give their loved one an edge. I am regularly asked about whether a direct relative can co-sign to help with qualification.
While it’s a wonderful gesture there definitely needs to be careful consideration of the impact of co-signing.
Being obligated on a mortgage for someone else means being responsible for payment should your family member find themselves in a position where they can’t make their mortgage payment. If you don’t step in your credit record will be severely impacted.
It also means that it could restrict your options should you need to qualify for a mortgage or other credit account yourself in the future. Your loved one’s mortgage will show up on your credit report and the full payment will need to be factored into future qualifying scenarios.
Then there is the question of being a Co-Applicant or whether it is better to be a Guarantor. This also needs to be considered as they are very different.
Both strengthen an application with a weakness such as short time on job, credit issues or not enough income. The major difference is a co-signer is also a co-owner in the home and legally has a right of ownership and a right to the equity in the property.
A guarantor is only ‘guaranteeing’ the mortgage on behalf of the applicant – agreeing to step in and make payment should the applicant be unable to for some reason. They do not an owner in the property itself.
In BC, any owner in a property that has already owned before has to pay Property Transfer Tax (PTT) on their share of ownership. If a co-applicant owns a home or has owned previously and is simply helping qualify I usually recommend ownership to be split 99/100th ownership for the applicant and 1/100th ownership for the co-applicant so PTT is only due on 1/100th of the purchase price. This saves thousands in tax.
If a co-applicant wants to be dropped from the property and mortgage once the applicant can qualify on their own the co-applicant needs to legally sign off title in the home by filing a Transfer of the property at Land Titles. This usually costs a couple hundred dollars.
With a guarantor, once the applicant qualifies for the mortgage on their own they can either just replace the current mortgage with another without the guarantor or the lender of the current mortgage may agree to release the guarantor from the existing mortgage once they are satisfied the applicant now qualifies.
While it’s always nice to volunteer to help out when you can it’s a good idea to speak to a professional about what your participation in the process will mean to you. Know what you’re getting in to so you’re prepared for the future.