The way it works is that all applicants would be applying for the mortgage, and then the debt would be shared equally among them so there's not really a percentage amount. They could be helping as little as 5% to as maximum as 100%, depending on the strength of the cosigner.
Applying for a mortgage? Can't meet all the financial requirements? In this episode, we discuss how a mortgage cosigner can help and when to use one. We also explore if there are limits to how many cosigners a mortgage can carry as well as the financial/credit impacts to the cosigner. Finally, we look at how to get a cosigner off your mortgage and if you need to go through another approval process.
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Hi everyone. I'm Karl and welcome to another Homebuyer's School video, a channel where you get the latest strategies, tactics and tips from home buying experts. Remember, this is your first time on this channel and you want to get the latest strategies from the experts, hit the subscription button [00:00:30] below, hit the little notification bell so you don't miss anything.
Today I'm talking with Mujtaba Syed, Mortgage Specialist with the Bank of Montreal, and today the question we're going to answer is:
How does a mortgage cosigner work?
Mo, what is a mortgage cosigner to begin with?
Yeah, that's a great question.
A mortgage cosigner, technically what they are, they're considered to be someone that you can add to the mortgage application to help if you're missing some sort of information.
It could be there is an income requirement or there's a credit requirement, there could be [00:01:00] an asset requirement, depending on what the lender's looking for.
A cosigner's definitely, they're going to fill the gaps of whatever you guys are missing in the application.
When would you actually use a cosigner?
The best time to use a cosigner is when you're not qualifying on your own, when you're having issues of qualifying.
Like I said, it could be credit related.
You might have had some pre-payments in the past or some late payments in the past, it's affecting your credit and your ability to borrow today.
A cosigner can help and kind of alleviate that. What it does [00:01:30] is it adds a little level of security to the lender, saying that, "Hey, listen, we have one more person that they can rely on just God forbid if something does happen.", or same thing with the income part, if your income is slightly lower than where you needed to be at and this home is not meeting the stress test, the cosigner can help alleviate that with their income and their credit.
Is there a limit to the number of cosigners on your mortgage?
How much does a cosigner actually help with the mortgage?
Is there like a maximum limit that they're allowed to, [00:02:00] percentage wise for the mortgage? How does that work?
Yeah, the way it works is that so all three applicants would be applying for the mortgage, and then the debt would be shared equally among the three so there's not really a percentage amount.
They could be helping as little as 5% to as maximum as 100%, depending on the strength of the cosigner.
The stronger the cosigner the better, so when you are looking for a cosigner, try it to be like immediate family, because the lender always wants to know what's the relationship?
What's the stake for the cosigner to be able to go on take on this [00:02:30] extra debt.
It can be immediate family, father, mother, brother, sister, et cetera or someone else that could be considered immediate family and someone that has good credit and good income, someone that can actually make whatever you're lacking, kind of cover that with the bank so they feel comfortable enough with the application.
I'm surprised that when you said 100% so they could actually as a cosigner, you could take 100% on of the mortgage.
Let's say, [00:03:00] your brother has no income, so you can essentially take that mortgage for him entirely.
Absolutely, yeah because the way the cosigner works, a cosigner is, there's no difference between a primary applicant and a cosigner.
The banks or the lender will treat them exactly the same. They're the same, whether it is primary or secondary cosigner, they're considered to be owners of the home and liability stake within the mortgage as well.
There's a couple different scenarios, let's say if your credit doesn't qualify [00:03:30] for us to use any income, because there are some hard fast rules when it comes down to a level of credit that's required for a mortgage application.
If you fall below that threshold, then the cosigner would have to take, would have to use 100% of their income to cover the stress test to cover the debt of that mortgage.
Sometimes it could be as much as 100% or sometimes your income's great, your credit's great, but you're slightly lacking and they only need to add an extra 5% of their income to help qualify.
Every situation is going to be different but the good thing is [00:04:00] you can go from 5% to 100% depending on what your needs are.
Remember, if you want to know more about how much you can get approved for a mortgage, watch our video above and in description below.
Other mortgage co-signer requirements
I think you already talked about the requirements for a cosigner, like obviously, the bank wants to know someone that you know.
Any other specific requirements, or that's pretty much just as long as they have good income and good credit?
Mujtaba Syed [00:04:30] :
Yeah, requirements are going to be that they're going to be homeowners with you. That's something that is something that's missed, so they technically are a share, they have a share in that home, so picking a cosigner is very important. It's something that you should do with a lot of thought and and consideration, because they will own that home just as much as you do.
They will also have a liability to pay back as much as you do. Technically, they're in it with you and just like as you are.
Look at it that way and [00:05:00] make sure that they have good credit, good income. The whole idea is to make the application look as strong as possible to fill the gaps that you might be lacking or missing.
What are the financial/credit impacts to the co-signer? Impact to buying a home?
Well, let's take a look at it from the perspective of being a cosigner then. What is the impact on you? Imagine if you're taking on a $400,000 home at 50%.
How does that impact your ability to let's say, buy a new home or your credit? What are the impacts?
The way [00:05:30] it looks like is that you are actually that homeowner. You might not live there as a cosigner.
You might just be helping out a family member but that shows up on your credit bureau and on your assets and liabilities as you are that homeowner, meaning the full payment counts against you.
They're not going to take one third of that payment or half that payment, it's 100% of that payment that's going to apply to you in any future lendings you might have, whether it to be buy a car, whether it to be buy a home for yourself, whether it to be [00:06:00] any type of lending whatsoever.
Once again, a cosigner should also be very careful with all their details before becoming a cosigner because sometimes it takes some time to get off.
It can be as soon as six months, it could be a couple of years depending on what the requirements are, depending on what they need to do.
Definitely have that conversation with someone. It's great to help our family members 100%.
We should be, if we can do it, we definitely should try but know what you're getting into. Have a conversation with the lender.
Maybe if [00:06:30] you feel uncomfortable with your family members, book a separate meeting, have a one on one with them to find out exactly what the implications are to you to see if you can actually live up to that implications or live up to that responsibility of being a cosigner.
Is there a difference between a cosigner and a coborrower?
Technically in the eyes of the bank, no.
We consider the cosigner to be a coapplicant, which is the joint applicant, which is a part owner of the home [00:07:00] and part liability on the mortgage as well.
For the bank, we look at it no differently.
Karl Yeh: Then finally,
What happens if you have a cosigner with bad credit?
Then technically, they really wouldn't be a cosigner, because if they're not really helping alleviate the application or making the application any stronger, then it's probably best not to bring that cosigner on.
That's a question that your mortgage specialist can actually have with you.
Sometimes clients bring in a cosigner who are actually hurting the application more than they're helping [00:07:30] it. They might have their own sets of debts.
They might have lower income. They might have bad credit.
Once again, having a cosigner, it has to kind of fit in your scenario with your application so your lender can guide you and your mortgage specialist can guide you on that and if it doesn't work, it's probably best to find a different cosigner.
How to get a cosigner off your mortgage
Yeah, that's a really, really good question.
We get that question quite a bit when clients are coming in.
The way I explain this to my clients is that your [00:08:00] cosigner is there to fill a gap, so there's obviously a gap in your application.
We need to first find out what that gap is.
It could be credit related if your credit score is not where it needs to be at. It can be income related if your income level is not there.
To take a cosigner off could take as short as six months, it could take longer but what needs to happen is that you need to fill that missing gap that the cosigner is bringing in.
If it's income related, you would need to be able to replace the income of the cosigner with your income.
You might get a raise, you might get a new job, you might pick up some part [00:08:30] time work, those things can help alleviate that but it really just depends on what the gap was at that time.
It could be credit related where your credit's not where it needs to be at, and then you need to work on your credit. It could take six months, it could take a year, depending on your bureau.
That could actually help so first, we identify what the gap is, what the cosigner is filling. Then to take them off, we have to replace that gap and then yes, it's something that we do at the bank once your mortgage is already set up.
It's just called a covenant change, [00:09:00] something that your bank and your lender can discuss with you further.
Do you need to go through another mortgage approval process if you remove a mortgage cosigner?
Let's say if, like you were cosigning and then you had to take somebody off, you have to replace it or you can just as, what if you just want to take it on by yourself?
Is that okay too or do they do do a new check on you and your mortgage stress test? What happens?
Anytime you make changes to an application, anytime you make changes to a mortgage, it has to go through a reapproval process [00:09:30] because now you're changing the terms, you're changing the dynamic of the application, so we would have to do an application at that time.
If you want to take the cosigner off, we would see if you qualify to actually take this debt on yourself.
Maybe a year ago, you didn't, you could today if you have higher income, your credit has gone better.
We will tell you during the application process if it's possible. If not, then we might come back and say listen, we've tried.
Those gaps are still there. It could be the income, yes the income has increased, but not to a level that we can take this cosigner [00:10:00] off, or your credit has increased but not to the threshold that we need, so you might need to keep the cosigner a little bit longer but we will advise you or the mortgage specialist should be advising you on what the process is and the steps to take and the timeline on that.
Karl Yeh: Great. Do you have anything else to add?
No, absolutely. I think the best thing to do in this situation is just have a proper conversation. If your application is not getting, usually a cosigner comes in and when your application's not getting approved, there's something missing.
Have a conversation [00:10:30] with your lender, with your mortgage specialist, "Hey, listen, I can get a cosigner. What are the requirements? What do I need? Do they need to have a certain level of income? What is my application missing that I can fill with a cosigner??
In that way, you can actually, when you're looking for a cosigner, you know exactly what to look for, and have the conversation with them and then explain to them exactly what a cosigner is and then what your plans are in the future.
Great. The question of the day I have for you is [00:11:00] :
Have you ever been a cosigner and what was your experience or have you ever used a cosigner and what was your experience with that?
Let us know in the comments section below.
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About Mujtaba Syed:
Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.