Buying a home, and especially obtaining your first mortgage, is a major responsibility, not to mention a significant marker of life transition. Say you’re a newly minted university grad and you’re out on the job market. You may have landed your first job in an entry level position and your partner may have done the same.
According to Pew Research Centre findings, millennials, or those currently aged 20 to 37, are now entering their peak years for first-time home buying. Demographic research also indicates that millennials are also in the most debt of the post-war generations and face greater-than-average levels of unemployment or part-time or temporary work. These are facts that are bound to cause a few anxious nights. However, options are available for home buying that may put your mind at ease.
Millennials in the market for a new home may find the need to utilize a co-signer on their mortgage. Although generations past may have regarded this practice as a sign of financial irregularity, it is becoming increasingly more common due to high real estate market prices in major cities such as Toronto that have placed homes in quintessentially desired neighbourhoods out of reach of many first-time home buyers.
Despite the higher prices semi-detached and detached homes are fetching in Toronto, there remain ways for first-time home buyers to enter the market. The increasing density of condo units in major cities makes buying a condo a readily available option. However, don’t forget that elegant townhouses for sale in Toronto remain a very attractive choice.
What is a Co-Signer or Guarantor?
According to the Loans Canada blog, co-signing on mortgage loans is on the rise and most banks are handling these arrangements with greater frequency. First-time home buyers who are considering having a co-signed mortgage need to be aware of some basic things.
First, the most important aspect of this arrangement is the fact that you are transferring responsibility for your mortgage loan to someone else. There are two ways to do this – either via a co-signer, or a guarantor. The former is essentially a co-owner on the property, with their name appearing on the title. This option is generally used when the primary borrower needs a hand with their income qualification. The second, a guarantor, doesn’t have a claim on the home as an owner, but is personally guaranteeing, based on their own credit, that the mortgage will be paid. This option is generally used when the borrower’s credit score isn’t high enough to qualify on their own.
The guarantor or co-signer is commonly a parent or legal guardian of the home buyer.
In legal terms, the co-signer and guarantor assumes fiduciary responsibility and is legally bound to ensure the re-payment of the loan in full. Their name and credit history is used in place of the home buyer’s own. Thus, as in so many things in life, how you manage and maintain relationships is crucial to so many aspects of personal and financial success.
Key here is how well you engage in effective communication, goal-setting practices that include reasonable benchmarks for progress, and, in general, your facility in striving toward personal and career accomplishments. Although banks wouldn’t normally assess such characteristics in a co-signing situation, the person you seek out to co-sign your mortgage most certainly will.
Pros and Cons of Co-signing Arrangements on a Mortgage
Qualifying for a mortgage is about a range of assessments on a person’s credit history and financial solvency and involves reasonable due diligence to record and assess the borrower’s identity, background and demonstrated willingness to service his/her debt obligations on a timely basis. These principles of assessment are the same whether you are getting a mortgage on your own or for the guarantor if you have secured a co-signer on your mortgage.
Here are a few principles and facts regarding a co-signed mortgage on a real estate deal:
- The cosigner or guarantor is agreeing to be the backup and meet payments if the borrower fails to meet their mortgage payments.
- Their credit record is affected if the borrower has missed or late payments on the mortgage.
- They may be liable in any legal actions. His or her own property could be at risk in a lawsuit.
- They assume the debt load – the amount owed – by the borrower and this will increase the co-signers debt load. This may impact their ability to obtain more credit.
Co-Signing is an Increasingly-Used Option
Although there are risks involved for the co-signer or guarantor, a supported mortgage arrangement can enable the borrow to establish a good credit history. This is accomplished by regular payments on the mortgage debt which establishes a good record of payment. As the borrower establishes a good credit history they may wish to consider taking the co-signer off their mortgage and go it alone. This is an available option and can be a good way for first-time home buyers to get into the market and not have to wait until they establish a solid credit history on their own.
With these expanded options available for those with a willing co-signer or guarantor, what may have been unattainable now becomes a possibility. Given the veritable increase in co-signing arrangements, Toronto real estate listings are a good place to locate a first-time home for those new to the real estate market.