Mom, Dad I Need a Cosigner for My Mortgage

Cosigner

A third party to a loan who provides a guarantee that a loan will be repaid. The guarantee by the cosigner reduces the risk that the lender will lose the money he/she has distributed to the borrower. The cosigner signs an agreement with the lender stating that if the borrower fails to repay the loan, the cosigner will assume legal liability for it. A cosigner may be an institution, but is often a relative or friend of the borrower, especially for personal loans. Persons with little or poor credit history sometimes cannot receive a loan without a cosigner.  A cosigner must list the promissory note as a liability on financial statements.

Now that the Canadian government has tightened up the mortgage rules, some parents are being asked to co-sign  a mortgage for their children.

Why Use a Co-Signer

1. Credit score not where it should be
2. a blemish on the credit report
3. Too much debt
4. No credit score
5. Not at job long enough
6. Messy divorce or separation


The Cons of Being a Co-Signer

Often, an adult child will ask the parent to co-sign, as a speedy way of getting a mortgage for a house and some parents have been told they will just be the mortgage for 1 year.  The facts are the lender does not have to release the co-signer at any time.  You may be on that mortgage for the whole 5 year term or whichever term you picked.  The reasoning is that the lender wants a sure thing, no risk when the co-signer with a proven credit track record is on the mortgage, there is less of a risk.

When you co-sign, it is as if you have to make that payment every month.  This means if the parent wants to take out a new mortgage for themselves, they may not be able to because of debt servicing.  Even though they have never made a payment for their child.  The lender must make sure there is enough money for both payments in case things go bad.

To get your name off as co signer, you may have to terminate the mortgage and have the child get a new mortgage in their name.  There are penalties for terminating the mortgage , is your child prepared to pay the penalty? If not, the parent may have to pay the  penalty to get their name off of the mortgage.

Nothing breaks down a family relationship faster than money.  The old saying never lend money to family- may come into play if something goes wrong. 

The Pros of Being a Co-Signer

There may be  pros to being a co-signer it just depends on what happens in the life of your family.  The  happy feeling of being able to help your children can turn 360 degrees in to being the worst decision of your life.  As there are no guarantees in life and what will happen, you have to decide that you can make those payments for the term of the mortgage no matter what happens.

If you plan on co-signing just for 2 years, only take out a 2 year term. That gives your child 2 years to get their credit score high enough to take on the mortgage by themselves.

It is nice to think about helping your children and your children will appreciate it, but make sure you look after yourself first.

True Story About Co-Signing

Many years ago, my father co-signed for a car loan for me. I had been married and had no credit score to my name.
At the dealership my father told the loans person that the loan was to be put into my name, as I was the one needing the credit rating,  The loans person agreed.
We signed the papers. I drove away with my nice new to me car.
Fours years later when I had finished paying off the car, my father received a nice letter from the dealership, thanking him for the business and paying the loan off in a speedy manner.
I checked my credit report and the loan had never been in my name.

So, the moral to this story is, if you think co-signing will help raise your child's credit score, it probably won't.  Their name may be placed in 2nd line and may not show up on their credit report at all.