Recently, I have noticed an increase in the number of inquiries about co-signing a mortgage. So, the question is, what exactly does it mean to be a co-signer?
Why are we being asked this question so often? We say due to several significant recent government mandated changes to mortgage qualifying that both went into effect in late 2016 and now late 2017.
The first was the increasing of lending standards. Simply put, the lenders are now more than ever looking at the overall management of credit and being encouraged not to take risks. We see the increase in requests for a co-signer are mostly due to credit issues and/or job stability.
The second major change is a new ‘stress test’ which has especially impacted borrowers with less than 20% down. Borrowers must now qualify at a rate of 5.14%* though the actual interest rate charged for the mortgage is usually much lower. The major impact of this change is decreased affordability for many which means having to buy a less expensive house or look for a co-borrower to increase how much home they can qualify for. This stress test is now in place for all borrowers.
When considering becoming a co-signer questions need to be asked. Whether it be a credit issue or not enough income, you need to determine what is the eventual exit strategy for you from this joint mortgage at some time in the future?
What can you expect going forward? You are now applying for a mortgage and will be required to complete a full application and have your credit checked. As you are now considered to be a borrower, the lender will ask you for all paper work to support what you have disclosed on your credit application.
Document requests could include the following: Letter of employment and current paystub, last 2 years of financial statements if you are self-employed, last 2 years of personal income tax returns and corresponding Notice of Assessments. If you own property, mortgage statements, property tax bills and lease agreements will be requested. Even more documentation will be required if you are divorced or separated.
As you can see, it is not just a matter of saying “yes”. Once the Mortgage Approval is signed and all lender conditions have been met, you will then have to also meet with the lawyer who is registering the new mortgage.
What else do you need to be aware of?
- You now have a new debt and will have to report it every time you want to apply for credit which could affect your ability to borrow in the future
- How soon can you come off the mortgage? Find out what you are committing to and if this is to last indefinitely or only for a couple of years?
- Mortgages now report on credit bureaus so you could be adversely affected if there are late payments made by the main borrower
- If the applicant who is occupying the property cannot make the payments, you are 100% responsible to make them. Is your budget prepared for a possible extra financial outlay?
If you do agree to co-sign how will you monitor this?
- Ask for annual statements to be sent to you as well as the main borrower for both the mortgage and the property taxes.
- Consider a joint account for mortgage payments so you can check in every so often to ensure all payments are being made on time
- Talk about life insurance. If the worst occurs, have a policy in effect with yourself as the beneficiary which would at the very least, cover a year of mortgage and property taxes so you are not hit with an unexpected series of expenses until the property sells.
Helping your loved ones realize their dreams of home ownership is great but do know exactly what you are getting into.
If you want to work with an experienced Mortgage Professional who will provide honest and accurate feedback about you as a borrower you should contact Kevin Mroczek today! Banker turned Broker with 35 years of experience. Email – kevin@mortgagegrp.com Call – Office – 780-675-5821 and Visit Kevin’s website. Follow him on Facebook
*current benchmark qualifying rate in effect