Owning a home can be one of the best investments you will ever make. It is one that comes with a variety of challenges that need to be met, chief among them being financing the purchase of the property. Even if homebuyers have a strong financial status, the vast majority of prospective homebuyers will need financial assistance to close the sale. This is typically in the form of a mortgage from a lender. However, getting a mortgage in 2023 can be challenging, especially if the borrower is deemed to have bad credit. The good news is that they still have options to explore, including using a co-signer to get a bad credit mortgage.
What does it mean to have bad credit?
Having a credit score below 574 is considered poor by lenders.
Borrowers with this credit score will be considered to have ‘bad credit’.
A credit score is a value scored from 300-900 that is used to gauge an individual’s creditworthiness, or in other words, how likely someone is to repay loans and other forms of credit given to them by creditors. Banks and other large financial institutions will not approve loan applications from borrowers with credit scores below 650.
Getting a mortgage with bad credit is difficult but not impossible. While you can wait to build up your income and credit and get approved in the future, if you want to get approved for a mortgage without having to wait years, you should consider finding a co-signer for your bad credit mortgage.
What is a Co-signer?
A co-signer is an individual who signs on to the mortgage agreement, assuming shared responsibility for the loan. They essentially act as a financial partner for the primary borrower, the individual that is unable to get the mortgage approved on their own. The co-signer’s purpose is to provide security for the mortgage, they will have to pay for the entire mortgage if the primary borrower fails to keep up with the required payments. This reduces the risk of approving the mortgage application.
Parents helping children buy their first home are the most common types of co-signers, but anybody can be one provided they fulfill the lender’s requirements.
What Are The Requirements for Co-Signing a Mortgage in Canada?
- A credit score of at least 650
- Proof of employment
- Proof of steady income over the past 2 years
- Contributing to the down payment if the size of the primary borrower’s down payment is insufficient
- Submitting financial information about your assets and liabilities.
What Are The Requirements for Co-Signing a Bad Credit Mortgage in Canada?
A co-signer could be enough to help you secure a bad credit mortgage as long as their financials and credit score meet the lender’s requirements. If the co-signer has good credit and income, you will have a good chance of getting your mortgage application approved with a bank lender. If the co-signer does not have good credit, they can help you get a bad credit mortgage with an alternative lender by offering their property as collateral.
In Ontario and all of Canada banks do not offer bad credit mortgages, but private lenders do. Private mortgage lenders focus more on the value of the property and how much equity the borrower has rather than their credit score.
So, when co-signing a bad credit mortgage, the co-signer does not need to have good credit. In this case, the co-signer can help the borrower qualify for the bad credit mortgage by providing funds if the down payment amount is under 25%. Private lenders require that borrowers have a down payment of at least 25%. They will not approve of mortgages that are worth more than 75% of the current market value of the home being mortgaged.
Just like with regular mortgages that are co-signed, the co-signer will be fully responsible for making monthly mortgage payments if the primary borrower fails to do so. Private lenders will charge higher interest rates than banks, usually around 7-15%. At the beginning of the mortgage, they will also charge administration fees ranging from 3-7% of the mortgage’s total value to set up the loan agreement. This is another area that may require the co-signer to intervene by providing financial support to ensure that the mortgage can be finalized.
The Benefits of Co-Signing Mortgages
If you get approved and successfully manage the loan for a few years, you can refinance the mortgage for better terms, and you may no longer need the co-signer.
- It saves time, allowing you to get a mortgage without having to wait to build up your credit score or significantly increase your current income
- Making all the required payments on time will have a positive impact on your credit score.
- It can help you quickly grow your wealth if the home you are getting the mortgage for is in a growing real estate market
- It helps younger and poorer individuals gain home ownership
- Bad credit mortgage lenders will consider the loan less risky with more people being responsible for the loan.
The DrawBacks of Co-Signing Mortgages
Even if the co-signer is not making any payments towards the mortgage, the total value of the mortgage is counted as credit being used by them, meaning they will have a reduced ability to draw credit, and their credit may be negatively affected if they try to take out too much credit while being a co-signer.
The co-signer is responsible for all mortgage payments if the primary borrower fails to make the necessary payments
Learn More About Bad Credit Mortgages and if Finding a Co-Signer Will Get You Approved
Making decisions around real estate is anything but easy, especially for those with poor credit who are looking to own a home. There are many options to consider, and mortgage lending is a complex and challenging field to understand. If you are trying to get a bad credit mortgage in Ontario, you should consider asking for advice from active professionals in Ontario’s real estate industry.
At Mortgage Broker Store we have been working in Ontario’s real estate market for well over a decade. Our team understands what lenders in the province need in order to approve mortgage applications. Having worked with hundreds of lenders across the province, we can determine what kind of mortgage you can get approved for, and if not, we can work with you to determine if a co-signer option should be pursued. Give us a call at (416) 499-2122 or fill out a form on this website to learn more.