A frequent question that arises that made me do a video 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.