In today’s market, qualifying for a mortgage is no easy feat. Even the most financially-stable applicants may find themselves lacking in certain areas when it comes to meeting mortgage prequalification requirements. One possible solution is enlisting the help of a family member or close friend to boost your application and seek approval.
Often, first-time homebuyers face obstacles with their applications due to insufficient assets or lack of sufficient enough income to cover core homeownership expenses such as property taxes, loan payments, and more. A lender must then assess debt-to-income ratios and determine if too much of an applicant’s income is needed to service such foundational needs. If so, further assistance may be required to qualify for a loan.
GDSR (Gross Debt Service Ratio). GDSR is the sum of your core housing costs – your mortgage loan, property taxes, heating bill and half of your condo fees (if applicable).
TDSR (Total Debt Service Ratio). TDSR includes ALL your monthly debt load (credit cards, student loans, car payments etc.) combined with your core housing costs. All are expressed as a percentage of your gross income.
Adding a Co-Signer
When it comes to seeking a co-signer for mortgages, applicants with a less-than-ideal credit history are the traditional target. However, low incomes are often the real culprit behind needing a co-signer’s assistance. Moreover, family members such as parents and children, siblings, and significant others can serve as co-signers for one another. Multiple signers may be approved by a lender if they prove to reduce associated loan repayment risks. Ultimately, it boils down to the judgement of the lender in regard to a potential co-signer’s financial stability.
When selecting a co-signer, lenders put specific emphasis on certain aspects of the individual’s financial history. Generally speaking, lenders will take into account their income, credit score, and overall stability. So when deciding on a potential co-signer, you want to assess who can make up for any weaknesses in your application that could lead to being denied.
For example, if you have insufficient income, pair yourself with someone with a reliable source of earnings. In the same vein, if your credit is less than ideal, seek out an individual with an outstanding rating.
For instance, consider this situation: your candidate displays tremendous equity in their property, but they are primarily reliant on CPP/OAS as their main source of money as they have already paid off their mortgage; since their income doesn’t meet requirements, they are not the best choice even though their substantial net worth supplies a measure of security.
When discussing a co-signed mortgage, there are two scenarios.
The first is when the individual becomes a co-borrower in which their credit history and income are added to the loan application, making them an equal financial partner if a mortgage default were to occur.
Alternatively, someone may choose to take on the role of guarantor in which they vouch for the principal applicant and will be equally responsible for repayment should the situation arise. Although not as preferable, some lenders may accept being a guarantor as an option instead of becoming a co-borrower.
In either case, significant financial implications should be considered before making any decisions regarding co-signing or guaranteeing a mortgage.
Will it affect the co-signers credit?
Co-signing can have a major impact on credit scores. It’s essential that all payments are made on time because any delays or missed payments will reflect poorly on the co-signer. To ensure this doesn’t happen, it’s important to monitor how the primary borrower is doing and address any issues quickly before they become unmanageable. Ultimately, if all payments come in as scheduled, a co-signer may not experience any negative effects on their credit rating.
When co-signing a mortgage, numerous risks must be evaluated. First and foremost is the potential for the primary borrower to default on payments, for which the co-signer would be held fully responsible. This may result in late or out-of-pocket payment occurrences and damage one’s credit score.
Furthermore, capital gains tax consequences and estate complications may arise should either party decease prior to satisfaction of loan conditions. Lastly, financial and credit information becomes public knowledge during this process, thus limiting privacy levels significantly and potentially affecting future loan applications. It is, therefore, critical that potential co-signers obey due diligence when entering into such an agreement.
Takeaways
In order to qualify for a mortgage, you may need approval from more sources than those who possess strong employment records and steady incomes. In such circumstances, you should consider obtaining a co-signer to increase your chances of approval. A co-signer’s credit score or financial background can make up for any deficiencies in the application. For instance, if your income is underwhelming or your credit score is insufficient, enlisting someone with an impressive financial profile could be advantageous in getting the loan.
