Co-signing is when someone agrees to be liable for your debt in case you are unable to make payments. It is a way to make sure you are able to buy a home, car, or other big purchase in the future, but it comes with some significant downsides.
In recent years, the number of people who have co-signed for a person getting a mortgage has been increasing. A co-signer is a person who agrees to be a guarantor on a mortgage, which means that if the person they co-signed for does not make the payments on the mortgage, the co-signer has to make up the difference. Co-signing a mortgage can carry a number of risks, including losing money on your mortgage by defaulting on the payments. Still, it can also provide you with protection from foreclosure. If you carry a mortgage on your home, this article will explain the benefits and risks of co-signing.
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Let’s talk about what is co-signing for a mortgage?
A co-signer (also called a guarantor) is a person who actively agrees to put their name on the mortgage contract in place of the other party. The other party is referred to as the borrower. With the amount of attention that has been focused on the housing market during the last few years, it is easy to think that everyone with a pulse has had to take out a mortgage at some point. But according to the Canada Mortgage and Housing Corporation (CMHC), there are still about over 1 million first-time buyers who are currently not able to make their mortgage payments. So what are some reasons why you might not be able to make your mortgage payments, and what are the consequences of not being able to make your payments?
Co-signing is when a third party signs a document authorizing a loan or mortgage for another person. This key third party is called a “co-signer.” When this term is used in the mortgage industry, the “co-signer” usually refers to family members, close friends, or other people close to the homebuyer. The main reason why the “co-signer” will be asked to co-sign is because the lender needs to be able to get the money back if the borrower does not pay the loan.
Benefits of co-signing for a mortgage
Not everyone has great credit scores or is able to get a mortgage on their own. A lot of people are getting into the habit of co-signing on loans for people they know but are failing to realize the downside of doing so. A co-signer becomes responsible for all the debt of the borrower and takes on all the payments, while the primary will only have to make the minimum payments. One of the most important tools a mortgage lender has is a co-signer or a guarantor. A co-signer is a person who agrees to share the responsibility for a loan if the borrower defaults. While usually a parent or close relative, a co-borrower can be anyone from a friend to a co-worker. In other words, a co-signer stands behind a loan.
Risk of co-signing for a mortgage
If you know someone who is buying a house, you may be asked to co-sign for them so that the bank will accept the mortgage. Co-signing means, you promise to pay back the lender if that person does not. The bank wants to know that you are a good risk: that you will pay your loan on time, and that you will not default on it. If you co-sign for a mortgage, you will be responsible for paying it back if the original buyer defaults on the loan. Here are some risks.
- You will be responsible for its entire loan amount
If you co-sign a mortgage for a friend or family member, you are putting yourself at significant risk since you become liable for the entire amount. We recommend talking to a mortgage broker in Langley (if that’s where you live) before making a decision. You won’t be protected by the debt-to-income ratio, and you may also be hit with a negative amortization penalty for taking on more debt than you can handle. If you co-sign a mortgage, it’s important to understand the risks and benefits. Know the math behind co-signing. Understand what is involved in paying off the loan. And make sure you know the loan agreement is strong enough to cover the full amount of the loan.
Ask anyone what the biggest risk in being a co-signer for a loan is, and chances are they will say the risk of not being able to pay the debt once the primary borrower has defaulted. Most people do not think about this, but co-signing a loan is not just about lending your good credit reputation to help someone else. It’s a promise to pay their debt obligations if they are unable to do so, including any late fees or collection costs.
- Your credit is a line
Your credit is on the line. This is not the first mortgage term you have heard of, but it is one that many Canadians are unaware of. When you co-sign for a mortgage, you are essentially lending your name to the person buying the house. As a result, you are entering into a legal contract with the lender to pay back the principal and interest due on loan for the entire term of the loan. You are protected by provincial law if you are approved for a mortgage, but there are risks involved.
- You can be sued by the lender
Have you ever co-signed for a loan? If you are like most Canadians, the answer is “no.” But, given the choice of becoming the victim of a lawsuit or running the risk of losing your home, it seems like a no-brainer to pay the mortgage off as soon as you can. Unfortunately, if you default on your loan, you might not be able to keep your home anymore. And, if you are the mortgage holder, you will be sued by the lender.
When purchasing a home, many people work with mortgage brokers like Mortgages Lab who take on the task of finding the best mortgage rates and packages. They can often provide a valuable service for you and your family, and in some cases, they can save you money by finding a good mortgage with a discount of $ or more.
