e53 - CoSigner VS Guarantor

[00:00:00] Well, buckle your seatbelts. I was just chatting with Pete before we started recording and I thought, geez, I don't know about today's topic, but he has sold me. It's actually another one of those unique lending situations that we can help you guys explore. It's not just an encyclopedic definition of what a co-signer and guarantor is.

[00:00:24] Oh yeah. So that's what we're talking about today. We're talking about co-signers and guarantors. And before you go and turn off this podcast, I'll tell you why. This episode is probably one of the most impactful that we might actually record. The reason is because most people don't know or don't know that they can be helped by having a co-signer or guarantor.

[00:00:48] And this essentially gets people into the home that they're looking for.

[00:00:58] You've landed on the Mortgage Life podcast, where we strive to bring you mortgage related info that's easy to understand.

[00:01:06] We have conversations with market experts to bring you timely updates because there's one certainty in this industry, things change.

[00:01:16] I'm Mindy Bodeway.

[00:01:18] And I'm Pete Salamosi. Welcome to the Mortgage Life podcast.

[00:01:30] So we're going to spend this episode talking about the difference between a co-signer and a guarantor, why you might actually need one or be able to utilize one, how you can qualify for that mortgage on your own to remove that co-signer or guarantor so that this cycle will come full circle.

[00:01:49] So let's talk a little bit about just briefly.

[00:01:56] You know, an example, we just actually closed a mortgage for a young couple who they were putting down a smaller down payment.

[00:02:05] So it was an insured mortgage.

[00:02:08] They tried through an application to buy this place on their own, but the lenders declined.

[00:02:14] And it was because they didn't have, it's not because they didn't have income.

[00:02:19] They actually did have income.

[00:02:21] But they didn't have the richness or the thorough or the depth of credit history that lenders and insurers required.

[00:02:30] So they were asked to have a co-signer on the application, which happened to be one of their parents.

[00:02:37] Put them on, application approved, and deal just funded.

[00:02:42] So lovely.

[00:02:44] It's a real life scenario.

[00:02:45] We see this all the time.

[00:02:47] So let's get into the definitions.

[00:02:49] Mindy, I'm going to ask you about a co-signer.

[00:02:52] We're talking about co-signers and guarantors.

[00:02:54] So what exactly is a co-signer?

[00:02:57] So a co-signer does have a little bit more legal obligation than a guarantor is.

[00:03:03] So we're going to start with this one.

[00:03:05] A co-signer, when you bring them into the file, is somebody who becomes legally responsible for the borrower's debt if that borrower fails to repay it.

[00:03:17] So it's as though the co-signer is party to the mortgage and the property just like the borrowers are.

[00:03:24] So it's great news for the borrower, but it is a big risk for the co-signer.

[00:03:30] So that's something we can also delve into in a minute here.

[00:03:34] Co-signers are often friends or family members.

[00:03:37] I'm going to say like in most cases, it's a family member because they are putting their own finances at risk.

[00:03:44] So it's usually somebody like straight up and down the family tree that we see.

[00:03:51] And also just something to keep in mind, co-signing isn't just for mortgages.

[00:03:55] I mean, this is something that happens with a lot of different loans.

[00:03:59] But of course, with us, this is something that we get.

[00:04:03] You know, we work through an application quite often with first-time homebuyers and we get to that point where it just doesn't look like it's going to work as far as the qualification is usually for a co-signer income.

[00:04:14] And then it's that question, do you have a co-signer?

[00:04:17] Do you have somebody that would want to help support you in this house purchase?

[00:04:21] Different than somebody that's trying to gift you a big down payment.

[00:04:24] You know, this is just somebody that's joining you in this transaction.

[00:04:28] Right.

[00:04:29] Well, and that makes a lot of sense.

[00:04:31] And going up and down the family tree is actually really sensible too, because oftentimes when you have young adults,

[00:04:39] so like the kids when they're young adults, they may be starting out their careers.

[00:04:43] They may not have the income.

[00:04:45] They may not actually have built up their credit history.

[00:04:48] And so getting mom and dad on the mortgage might be a really good option.

[00:04:53] And especially because mom and dad might be at this stage in their lives where they're actually free of a lot of the debt,

[00:05:01] because they've kind of gotten to that point in their lives where they have paid things down.

[00:05:05] Or they may be at the point where their income earning is quite high, so they can take on more debt.

[00:05:11] So really good points there, Mindy.

[00:05:13] So tell us a little bit about when a co-signer is necessarily needed.

[00:05:19] I know we alluded to a little bit of this in the intro, but break down the few different scenarios that we might see.

[00:05:26] Most commonly with the requirement for a co-signer is the income.

[00:05:32] The income isn't high enough or strong enough or has been occurring for long enough for the lender to feel like it's going to safely cover these mortgage payments.

[00:05:46] So in Canada, we're bound by debt service thresholds.

[00:05:49] Not to get too technical, but typically this is when the co-signer comes in.

[00:05:53] However, when a lender is reviewing the file as a whole, and like in the case of the application that Pete just mentioned at the beginning,

[00:06:01] where the clients, this is their first home purchase.

[00:06:04] They haven't been in their careers for long.

[00:06:06] They have the income, but they also don't have the credit history.

[00:06:10] So again, in that case, the lender is just looking at the application as a whole,

[00:06:14] wanting to make sure that their mortgage that they're providing is going to get paid as agreed.

[00:06:19] So they're bringing in this extra party to help strengthen the file.

[00:06:23] And credit history is one of those things that lenders look at.

[00:06:27] We might refer to the five C's if you get a chance to look that up.

[00:06:30] But the five C's are basically talking about that person's credit profile.

[00:06:34] And one of the things within that profile is it's almost like, you know, having a dating app.

[00:06:40] It tells people who you are.

[00:06:42] The credit profile shows your history in making payments and ability to make payments.

[00:06:47] So it's a really good indicator to lenders as to kind of what this person's going to look like.

[00:06:53] And that's why a thin profile or a very immature credit history just doesn't give too much of a picture.

[00:06:59] And that's why they like to see a co-signer.

[00:07:01] Yep.

[00:07:02] My first property I bought, my mom was my co-signer.

[00:07:05] It's not uncommon.

[00:07:07] And it's a great, I mean, could you imagine if we didn't have this option?

[00:07:12] Right?

[00:07:12] Absolutely.

[00:07:13] Absolutely.

[00:07:13] So, you know, it's a great step.

[00:07:15] And there's, you know, there's no negative stigma.

[00:07:19] Like this is an often used and very clean way of getting into your home.

[00:07:24] That's right.

[00:07:25] On the topic of income, the difficulty in the last little bit has been that we've had a stress test.

[00:07:33] Like you said, it's debt servicing.

[00:07:35] So stress test, we've actually had to qualify borrowers at 2% higher than the rate that they're going to be paying.

[00:07:42] And so because of that increased stress and looking at whether or not you can qualify, that's made it a lot more difficult.

[00:07:52] So co-signers have been a bit more of an option for us in the last little bit as the stress test has been a much more challenging obstacle to overcome.

[00:08:02] And house prices.

[00:08:04] Oh, yeah.

[00:08:05] If you want to talk about house prices, you want to listen to house prices, listen to our last episode with Dustin Woodhouse.

[00:08:10] We talked a little bit about house prices.

[00:08:12] And it's a very engaging listen.

[00:08:16] So absolutely.

[00:08:18] Mindy, you were talking about what risks do the co-signers take on?

[00:08:21] And I know from talking to a lot of co-signers, talking to a lot of moms and dads out there, that they're worried about what are the implications of me being on this mortgage?

[00:08:31] So what are they?

[00:08:33] Yeah.

[00:08:33] Yeah. And it's a good point.

[00:08:35] So for the borrower, they're not taking on a lot of risk by having the co-signer, right?

[00:08:41] It's the co-signer that is entering into this relationship with the borrower and the bank that's taking on the risk.

[00:08:50] So they are responsible for any missed payments.

[00:08:54] And the debt does appear on their credit and their credit history on their credit bureaus.

[00:09:01] And therefore, if the borrower doesn't make a payment, it shows up on the co-signer's credit.

[00:09:09] So the co-signer has to really trust the borrower when they're entering into this relationship.

[00:09:17] There's another way that it can affect the co-signer's credit, and that's the borrowing capacity.

[00:09:23] So again, when the borrower takes on this mortgage to buy this home and the co-signer is on that mortgage,

[00:09:33] then when the co-signer goes to apply for their own mortgage, they have to include that co-signed mortgage in their overall mortgage application.

[00:09:45] So that ends up reducing the amount that they could qualify for for their own big ticket item purchase.

[00:09:53] So that's something that I think quite a few people don't fully understand.

[00:09:58] I actually just had an example where I was doing the dad's mortgage renewal, and he had co-signed for his daughter's mortgage.

[00:10:07] And it wasn't explained to him properly at the outset what he was signing up for.

[00:10:12] And interestingly, on that note, the entire amount of that mortgage payment, so not just half, not just a portion,

[00:10:20] but the entire amount of that mortgage payment that they have co-signed for will have to be used in the debt servicing for that parent.

[00:10:29] So definitely something to be very mindful of if you're taking on a co-signer position.

[00:10:33] So yes, if you're thinking of buying your own home in the next few years as a co-signer, it will potentially affect you.

[00:10:41] So just something to keep in mind.

[00:10:43] And then how do you become a co-signer?

[00:10:46] You know, do you just say, I'm John, you know, I'm good for it.

[00:10:50] I'm great.

[00:10:51] Just give me the docs.

[00:10:52] I'll sign away.

[00:10:53] It's easy peasy, right?

[00:10:54] Doesn't work out that way.

[00:10:56] So tell us, what is the process?

[00:10:58] If we're getting a co-signer on an application, what do we need from them?

[00:11:01] It's the same as though you were applying for the mortgage on your own.

[00:11:05] So we do need to take a full mortgage application.

[00:11:09] We are going to ask for all of those documents.

[00:11:12] I can refer you to our documents episode for review.

[00:11:17] Standard income, down payment, if any of the down payment is coming from the co-signer.

[00:11:21] If any other properties that are owned, we're going to have to look at.

[00:11:24] Any other mortgages that that co-signer has.

[00:11:27] So it is a full standard mortgage application for the co-signer.

[00:11:31] Absolutely.

[00:11:32] And on that note, we do ask for a lot of documents upfront.

[00:11:36] It helps us get the exact details.

[00:11:40] If you've got any past history in doing mortgages, you may not have had to submit all these documents

[00:11:47] in the past, but we do ask for them today because lenders do require them.

[00:11:51] So it's a thorough process from the get-go.

[00:11:55] But on that note, if the co-signer is kind of done and they say, you know what?

[00:12:01] I would like to be off this loan because it's maybe impacting their ability to get their own loan or something like that.

[00:12:08] How would we terminate this co-signer relationship?

[00:12:12] How do they get off the mortgage?

[00:12:13] Good question.

[00:12:15] So if we think back to we've got the borrower, the co-signer, the lender.

[00:12:20] If you want to remove one of those parties, so we want to remove the co-signer, it's just the borrower and the lender.

[00:12:27] So we have to make sure that the borrower can qualify for that mortgage all on their own.

[00:12:34] Income, credit, did they buy a new truck?

[00:12:38] These things will all be looked at.

[00:12:41] It's not just, okay, you know, we got you past the threshold.

[00:12:45] We got you into your home and your mortgage.

[00:12:47] You know, we're done here.

[00:12:49] It is, yeah, it's like requalifying for the mortgage all on your own.

[00:12:56] There will be legal work involved.

[00:12:58] There will be a legal cost involved.

[00:13:01] There could be tax implications.

[00:13:04] I'm not going to go down that path, but there could be all questions that you can ask your tax accountant or your lawyer.

[00:13:12] But typically I find with these co-signer arrangements, they are, this changing of the title is usually done on renewal.

[00:13:22] I haven't seen many, like, you know, within a couple of years and then the clients are wanting to pay out the mortgage and potentially look at a legal fee or a penalty.

[00:13:34] So I would say plan to be a co-signer for the term of the loan.

[00:13:38] But again, it's, it's, everybody has a different situation, different legal parameters, different tax consequences, all questions for the other professionals that you work with.

[00:13:52] Absolutely.

[00:13:53] And from our side, we can say that the lenders all vary a little bit as well.

[00:13:58] So from lender to lender, we might see that, uh, with one lender, it might be a simple administration fee with another, they may require, uh, actual legal work.

[00:14:10] So it really depends.

[00:14:12] So connect with us.

[00:14:14] We can connect with your lender to find out what the process is and work you through that.

[00:14:19] Cause it is, sometimes it's a little bit cumbersome.

[00:14:22] Sometimes it's a little easy, just depends on the lender.

[00:14:25] It depends on the scenario.

[00:14:26] Like Mindy said, check with your accountant, check with your lawyer to ensure that you've kind of got all the bases covered, but it can be done.

[00:14:33] And I I've seen it where it's done relatively quickly within a year, or it can be done at, at renewal time.

[00:14:40] So it can be done throughout the process.

[00:14:44] Just check with us, check with your lender, uh, know that the options exist.

[00:14:49] And I think that's a little bit of a difference between a guarantor and a co-signer as well, right?

[00:14:55] So a guarantor is also saying, I'll be responsible for the mortgage if these people don't pay it, but they're not actually on title.

[00:15:06] So that is a different legal process to get them off of title, right?

[00:15:10] So I find with the guarantor relationship, it can, it's a little bit more seamless.

[00:15:16] It's, it's a less risky position for the guarantor.

[00:15:20] However, lenders prefer the co-signer for obvious reasons.

[00:15:25] Right.

[00:15:26] So, so just, uh, to back that up and, and this is where the legal side of things kind of comes in.

[00:15:32] So as a caveat, check with your lawyer, but, uh, legally speaking here in BC,

[00:15:37] under our land titles registration system, if someone is a co-signer, they're on that mortgage,

[00:15:43] they're also on title.

[00:15:45] So if someone were to search up the, uh, the title to that property, they would see all the,

[00:15:50] the borrowers, co-applicants, co-borrowers on that title.

[00:15:55] And basically it just, it's a much more secure way of ensuring that the person who has said that

[00:16:03] they'll be responsible for the property is actually responsible for the property because of that

[00:16:07] legal work.

[00:16:08] So there's a little extra legal step there.

[00:16:10] Um, I did want to get that out of the way cause it's, it's confusing, but it's important on that

[00:16:16] co-signer part.

[00:16:17] So guarantor, Mindy, carry on.

[00:16:19] Um, oh gosh, where was I?

[00:16:21] We're talking about not being on title.

[00:16:24] That's a lot simpler.

[00:16:25] Simpler.

[00:16:26] No, I think, so just from a mortgage broker's perspective, when we are sort of looking at this,

[00:16:32] okay, we've come to this point.

[00:16:34] We feel like we need some help with the file, like the, in order to get the client past the

[00:16:38] borrowing threshold, you know, we would ideally like it that we could have a guarantor, right?

[00:16:43] So this person still has to go through the same application process.

[00:16:47] We still have to take all your information.

[00:16:50] We still need all the documents, but we're trying to make it so that they don't necessarily

[00:16:55] have to go on title, especially if we're not needing their income to debt service the file.

[00:17:02] Um, and in some cases they don't, right?

[00:17:05] So this is mainly used in my experience, um, with an application that has some credit

[00:17:13] blemishes.

[00:17:14] So it's that of the five C's of credit, it's that credit character capacity scenario, um,

[00:17:21] that we kind of need that boost.

[00:17:23] So again, uh, could be common for a first time home buyer that has their salary, but the

[00:17:29] lender is just saying, hmm, they don't have much of a borrowing history.

[00:17:33] Um, how can we guarantee this mortgage is going to be repaid?

[00:17:37] And it's the guarantor.

[00:17:38] Right.

[00:17:39] And that's interesting because a person may have, uh, a lower credit score, um, because

[00:17:46] it's either not very well established or it could also be because they've missed payments

[00:17:54] or have had something go to collections.

[00:17:57] So sometimes that weaker credit is, is not necessarily due to one thing or another, but it could come

[00:18:03] from a few different sources.

[00:18:04] And because of that, lenders may require that, that guarantor piece.

[00:18:08] And just one interesting component.

[00:18:11] So cosigner and guarantor, you guys are both required to cover the mortgage payments in the

[00:18:18] case of a default.

[00:18:19] In the cosigner's case, the defaulted payments would immediately show up in their credit score.

[00:18:25] Whereas in the guarantor's case, the defaulted payments would only show up if it was the

[00:18:30] guarantor that wasn't making the payments.

[00:18:33] So say the original borrower stopped making the payments, then it would get, go to the

[00:18:38] guarantor to then make the payments.

[00:18:40] And then if the guarantor didn't, then it would show up as a default.

[00:18:44] So just something for the guarantor to remember is that if there was a default, you are then

[00:18:49] responsible for the entirety of the mortgage payments.

[00:18:55] Interesting.

[00:18:55] So lots to think about there.

[00:18:58] What about, so we talked a little bit about how to get the application, what the differences

[00:19:03] are.

[00:19:04] What about at the process where we want to remove a guarantor?

[00:19:08] Same thing as with a cosigner.

[00:19:10] And in this case, because the guarantor is not on title, it's not as much of an extraneous

[00:19:18] process.

[00:19:19] It's this kind of scenario that I find in a lot of cases, lenders can do this internally.

[00:19:26] But there will probably still be fees because there usually are transaction and admin fees,

[00:19:32] but it's not as cumbersome as basically removing yourself as a cosigner.

[00:19:39] But again, because these relationships are becoming so common, I'm finding that lenders are becoming

[00:19:46] more flexible in how they handle the removal of cosigners and guarantors, which is great.

[00:19:52] Absolutely.

[00:19:53] So to summarize this episode, if you think that just because you didn't qualify for a mortgage,

[00:20:00] that that's the end of the road, it is not.

[00:20:03] There are options and options exist, whether we're talking about cosigners or guarantors.

[00:20:09] There is a process to get them onto that application.

[00:20:13] There's also a planning process to remove them from the application or the mortgage once it's

[00:20:20] done.

[00:20:20] And all of that should be part of the planning process that goes into this whole bit right

[00:20:28] from the very start.

[00:20:29] Know how we get in, know how we get out, and we've got some happy clients.

[00:20:34] Mortgage planning.

[00:20:36] Maybe not 101, but this is maybe 201.

[00:20:38] This is one step advanced.

[00:20:40] It's interesting.

[00:20:41] I mean, everybody can acknowledge a financial planner, but there's a flip side.

[00:20:46] There's mortgage planning.

[00:20:47] And it's true.

[00:20:48] You have to be transparent and knowledgeable and provide this information to your clients.

[00:20:54] And this was made very clear to me a couple months ago, like I said, with that father

[00:21:00] who was in a relationship that he didn't even fully understand.

[00:21:04] So here you go.

[00:21:06] Now you understand.

[00:21:08] And again, options exist.

[00:21:11] Options exist.

[00:21:12] If this has been useful to you, please like, subscribe to it.

[00:21:17] If you like it, you're going to love the episodes that we have coming up in the future.

[00:21:21] And if you think of someone that might actually benefit from something like this, share this

[00:21:25] episode with them.

[00:21:26] If they're thinking about taking on a co-signer relationship, this might just give them some

[00:21:31] insights and some questions to ask their mortgage broker or their financial planners.

[00:21:36] Come back and listen.

[00:21:37] I guess we can always end with that.

[00:21:39] Come back and listen.

[00:21:40] Come back and listen.

[00:21:43] This is The Mortgage Life.

[00:21:44] We look forward to continuing the conversation.

[00:21:46] So come back and listen.