Tips, Advice, and Explanations from a Vancouver Mortgage Broker  

Archive for the ‘Guarantor / Co-Signing’ Category

Risks of Having Your Son or Daughter Co Sign

Wednesday, October 6th, 2010

Transcript of Video:

Hey, everybody, it’s Rowan Smith at the Mortgage Centre. I want to talk today about something that happens very frequently, which is two parents looking to buy a piece of property, and maybe they can’t quite qualify for it. So they look to stick it into their child’s name as well or bring their child onto the application.

The other reason I see it is because the child has his first-time home buyers’ rights. Maybe the parents have already owned a property, and they’re trying to buy a new property, and it’s going to trigger $6, 000 in transfer tax, so they decide to put it into child’s name instead and put them on as co-signers.

Now, on the surface this may seem like a good idea. Maybe putting your son or your daughter on there right now frees up your money, what could be $6, 000. Perhaps it makes the deal work in the first place because their income, their job is just enough to push you over the edge to get qualified for it.

But there is a consequence to doing this. When you put them on there, they’re losing their rights to first-time home buyers. They’re not going to be able to claim first-time home buyer status, and they’re going to have to go without owning a property for several years before they can do the first-time home buyer RSP withdrawal plans.

So you have to weigh the costs today of saving them, or saving yourself, rather, the cost of the property transfer tax of buying the home in the first place against what you’re going to be taking away from the future. I’ve had many parents had to pay their children six or seven thousand dollars when their kid went to get a property five, 10, 20 years later and was ineligible for the exemption from the property transfer tax. It can add up and can be a lot of money.

So before you do that, at least have a speak with me and consult with me and see if there’s a way we can structure the deal where maybe we put your child on as a co-signer to get the deal done rather than having to put them on title.

Or perhaps there’s different ways to structure the ownership, dividing it up among certain percentages of the owners, so that you can avoid or minimize your property transfer tax. There’s workarounds for this, but just throwing a third party on it, especially a child, is not the way to do it.

So if you’re in that situation, give me a call. For the Mortgage Centre, I’m Rowan Smith.

Co-Signers and Guarantors – Definitions and Risks

Tuesday, September 21st, 2010

Transcript of Video Blog:

Hi, everybody. It’s Rowan Smith from the Mortgage Centre. Today I want to talk about co signers and guarantors, and what the risks are, and what you face as a co signer or as a guarantor, and really what all this stuff means. Now usually somebody is not required to get a co signer or guarantor unless they cannot qualify for a mortgage or a car or whatever it is on their own. Now a co signer or guarantor are two different terms, but generally in the industry they’re used interchangeably.

So when someone says a co signor or guarantor, what they typically mean is one person’s name is on title who’s buying the home and another person is going not on title but on the mortgage. It’s not possible to be on title but not on the mortgage. That isn’t allowed. The mortgage lender will say whoever is on title has to be on the mortgage. But not everybody on the mortgage has to be on title.

That’s important. If one family member’s a first time home buyer and they want to preserve their first time home buyer rights, this is where we use it, or when one person is a parent and they’re just helping their child buy a home.
So in these circumstances, what are the risks of a co signer/guarantor? Well, you end up having to get independent legal advice when you close on the mortgage as the co signer. So the co signer will go in with the mortgagor to purchase the property or to refinance or whatever they’re doing, and they’ll immediately have to go get something signed from another lawyer, a different lawyer at a different firm, that says they were given independent legal advice.
The reason is they become jointly and separately liable, meaning that not only are the co signers’ incomes at risk for them to be sued for garnishments, but any other assets they have can be chased down by the lender.

Now in practice, this doesn’t really happen. It’s very rare that a lender has to go to that extent to chase a co signer down, typically because co signers are co signers because they add strength to a deal. They should have the cash resources to bail out the person they’re co signing for in the first place. That’s why the bank got them there.

So why does somebody need a co signer? Oftentimes, it’s lack of job stability, lack of job history, a new job. Typically, it’s income. It can be because they have poor credit, or maybe their credit situation is just dicey because of a divorce or a lost job or illness or what have you, and they need a co signer.
Now in those circumstances, co signers, be aware that you are not just signing on that mortgage. Your risk is not limited to just that mortgage. It extends beyond that. Now if you need actual advice on how far the lenders can go, I advise you to speak to a lawyer.

But my advice in this case is be very careful who you’re co signing for. Typically, I only see it amongst family: mom and dads co signing for children, a brother co signing for another brother. The reason is friends don’t like to do it because it limits what they can do in the future.

If I qualify myself for, let’s say, a $500,000 mortgage, and my friend is buying a $200,000 condo and I co sign for him, my purchasing power is reduced by that $200,000. If I want to go buy a $500,000 home, I can’t. So before you go and co sign, speak with me, and I can let you know how much your co signing is going to reduce your purchasing power going forward.

You’re obligated to disclose that you’re a co signer on another mortgage, even if the bank isn’t aware of it, in most cases they will be, however, especially if you’re co signing on a loan with CMHC, Genworth, or Canada Guaranty.
So before you co sign, please speak to me or get legal advice. I can at least advise you on how the limitation of getting this new mortgage debt in your name as well is going to affect you going forward.

Maybe it’s a temporary thing, and we can get you off the co signing of the mortgage at the end of the term, maybe after one year, depending on the situation of the actual applicant.

For the Mortgage Centre, I’m Rowan Smith.

What is a Guarantor and Co-Signer (Cosigner)?

Thursday, April 15th, 2010

A frequent question that made put out this blog:

Transcription of Video Blog:

Hi, everybody. It’s Rowan Smith at The Mortgage Center. I wanted to address a topic that’s come up a number of times, which is guarantors and co signers and really what a guarantor co signer is. For the most part, for a mortgage, if you’re asked by your broker or your lender to get a co signer, it’s because your income doesn’t really qualify you for the mortgage that you’re trying to get. It could also be that your down payment isn’t enough, but typically the reason has to do with income and whether or not you’re able to document it in a way that’s sufficient with the bank.

People say “Well, the co signer or guarantor, they’re just signing their name on it, right?” Well, not really. The whole point of a guarantor is to add strength to a deal. So, first off, what does a guarantor or a co signer need? I’m going to use those words interchangeably, because they realistically mean the same thing.

A guarantor or co signer needs to have either A; a whole lot of assets, like a clear title home in their name, so a parent or grandparent, or they’ve got to have a lot of income. When I say income, I don’t just mean they earn a lot. They have to earn a lot, but not also have a subsequent large amount of debt.

In my experience, people will say, “Oh, I’ve got my uncle. He makes a couple hundred thousand dollars a year.” Well, people that make a couple of hundred thousand dollars a year tend to have pretty large mortgage payments. If they don’t have large mortgage payments, then they tend to have a lot of other debts and line of credit facilities, car lease payments for tax purposes and all that.

So, just because they make a lot of money, it’s not enough. They also have to have what we call unencumbered income. That’s income that doesn’t require a lot of other payments and the like. So, when they signed on there, what are their responsibilities? Well, it’s what you call a contingent responsibility.

In the event that you, the primary applicant fail to make payment, they have the rights to go after your co signer. Now, how far does that right extend? Well, if they take a loss on the property, you and the co signer are both jointly and separately responsible for that debt or for that loss in the event there is a foreclosure and they subsequently take it.

They will go after that foreclosure as rigorously as they would go after you. So, if you skip town, or you leave, or you throw up your hands and say, “I just can’t afford the payments,” they will turn to your co signer and attempt to force a sale of some of their assets if it comes to that. It often doesn’t, and the co signer will often have to eat the brunt of the problems.

This is why we see a lot of people who have one damaged item on their credit and nine good ones. That’s because they’ve agreed to be a co signer for someone who really didn’t deserve it. So, if
someone’s asking you to be a co signer, don’t jump the gun and say, “Yes” just because they’re your friend.

You’ve got to do the smart thing, and you’ve got to look out for yourself. Make sure that you understand all of the risks and responsibilities. Go with that responsibility, being a co signer, and see what you’re getting out of the deal as well. Don’t hurt your own financial position just trying to better somebody else’s.

For The Mortgage Center, I’m Rowan Smith.