If you keep up on the news you know that qualifying for a mortgage is getting tougher and tougher. Someone who would have sailed through the application process 10 years ago could find themselves declined for a mortgage today.
Often I find applicants can afford the monthly payments but they can’t prove that their income is stable. If they waited another 6 months to a year, they could but they would miss out on a great opportunity to buy a home now. Buyers who have recently switched jobs, receive overtime or get a portion of their income from tips are the people who need co-signers to make the deal work. A strong co-signer can be more persuasive to a lender than offering to put more money down.
I also have found that people with “thin” credit are being asked for co-signers. These are applicants who have one credit card but no car loans or other credit facilities showing on their credit bureau report. Often they are recent university graduates who recently started work.
Rick Bossom, an accredited mortgage professional with Bayfield Mortgage Professionals in Courtenay, British Columbia, says that it’s an alternative to lenders just turning the deal down in cases where the borrowers are just on the edge of qualifying.
“They’re close but they just need a little bit more and that’s why the co-signing thing would come up. It’s not like they’re really, really bad, they’re just not quite there.”
What does a co-signer do? Their job is to continue payments in the event that the main applicant(s) default on the mortgage. In essence, they are saying that if you skip out on the payments, they will take up the slack.
As a result, lenders want to have co-signers on the application just as if they would be living in the home and making the mortgage payments. If they have mortgage payments of their own, they have to show that they can financially afford to pay both mortgages and any other monthly obligations that they may have like car payments.
One thing that surprises primary applicants as well as their co-signers is the amount of information required from the co-signers. They will have to provide an employment letter, recent pay stub, a credit bureau report at a minimum. If they are self-employed company income documents will also be required.
It’s always best for the primary applicant to have a conversation with the co-signer or co-signers to inform them of this in advance. The co-signers should also be aware that this will tie up their credit for the term of the mortgage. If they are planning on buying a vacation home or making a large purchase, they may be declined based on their financial obligation to your mortgage.
However, there is one feature that banks don’t tell you about but your Dominion Lending Centres mortgage professional will tell you. There’s the ability to remove the co-signer from the mortgage after 12 months of successful on time mortgage payments. Co-signers don’t have to stay on the mortgage for the whole term.
Make sure that you mention that you are interested in taking your co-signer off the mortgage in a year and your mortgage broker can pick a lender who will allow this. It’s really nice to be able to remove your co-signer and thank them for their help without tying up their credit capacity for 5 years.