Nowadays, more Canadians than ever require a cosigner in order to secure a mortgage. Doing so gives the lender a guarantee that loan payments will be made by the primary borrower or cosigner. As a result, buyers usually have an easier time qualifying for a mortgage and for higher amounts!
Even if you can handle the monthly mortgage payment, lenders also want to know there’s still money left over for other essential costs (minimizing the risk of default). Between higher home prices, higher interest rates and stress tests, as well as the higher cost of living, many lenders will require homebuyers to have a cosigner. So let’s look at some cosigning scenarios and how this dovetails to a conversation on cohabitation agreements.
Cosigners
Cosigning means bringing a third party in (typically a family member or relative) to help with your mortgage application and approval. A cosigner usually fills a gap in your application be it credit, income, or even employment. Effectively, all parties’ incomes and situations (combined) are taken into account.
In terms of finding a cosigner that will help qualify and secure a good mortgage, you’re looking for someone who has:
- Good credit history and high credit score (660 – 900)
- Stable employment and high monthly income
- Low debt-to-income ratio (ideally no large debts)
Let’s say you’re looking to get pre-approved, you have an excellent job, and great credit BUT you’re priced out of your desired range due to the stress test. Since we can’t produce income from thin air, the easiest way to get qualified is to add a cosigner. With someone willing to cosign, there’d be enough income to qualify for the financing on the desired property and that’s that! Right?!
Not necessarily. When a cosigner is brought on, they are bringing to the table what it is you are lacking (be it better credit, higher income, job history, etc.). That said, the cosigner’s whole life comes with them, financially speaking. That means their mortgages, car payments, credit history, and everything else factors in. Remember, they’re technically going to own up to half of your home.
In today’s real estate market, lots of people need the help of cosigners because rates are higher. Therefore, the stress test rates are higher too so don’t take it personally! So long as you can bring in someone whose income and debt load plus your income and debt load can support their life and yours, you should be good. Depending on the situation and relationship, you may also want to consider a cohabitation agreement.
Cohabitation Agreements
A cohabitation agreement is a contract typically made between two people (cohabitants) that want to live together. They’re designed to protect the cohabitants’ individual interests as well as determine what rights and responsibilities each person has should the relationship end in the future. That said, the contract can be created for people investing in a home together regardless of who will be living there.
The agreement simply protects all parties involved in the buying process. Continuing with the earlier example where a friend or family member is brought on as a cosigner, a cohabitation agreement would be used to state how much ownership you versus the cosigner have. It would also outline what occurs if something were to happen to either of you.
A more traditional use case example for a cohabitation agreement might be a couple moving in together where one person is putting in significantly more money upfront. This situation might be made more complicated if one partner’s family is gifting a bunch of money. A cohabitation agreement, in this case, would acknowledge this and outline what happens in the event of a breakup. Everything from the down payment funds and how the remaining equity is divided up would then be accounted for from the jump!
Everyone’s path to homeownership is different. Contact the Kyle Miller Mortgage Agent team today so we can guide you on your journey!
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