Category Archives: co-borrowers

The Benefits and Risks of Co-Signing for a Mortgage

 

Thanks to tighter mortgage qualification rules and higher-priced real estateparticularly in the greater Vancouver and Toronto areasit’s not always easy to qualify for a mortgage on your own merits.

You may very well have a great job, a decent income, a husky down payment and perfect credit, but that still may not be enough.

When a lender crunches the numbers, their calculations may indicate too much of your income is needed to service core homeownership expenses such as your mortgage payment, property taxes, heating and condo maintenance fees (if applicable).

In mortgage-speak, this means your debt service ratios are too high and you will need some extra help to qualify. But you do have options.

A co-signer can make all the difference

A mortgage co-signer can come in handy for many reasons, including when applicants have a soft or blemished credit history. But these days, it seems insufficient income supporting the mortgage application is the primary culprit.

We naturally tend to think of co-signers as parents. But there are also instances where children co-sign for their retired/unemployed parents. Siblings and spouses often help out too. It’s also possible for more than one person to co-sign a mortgage. A co-signer is likely to be approved when the lender is satisfied he/she will help lessen the risk associated with loan repayment.

Under the microscope

When you bring a co-signer into the picture, you are also taking their entire personal finances into consideration. It’s not just a simple matter of checking their credit.

Your mortgage lender is going to need a full application from them in order to grasp their financial picture, including information on all properties they own, any debts they are servicing and all of their own housing obligations. Your co-signer will go through the wringer much like you have.

What makes a strong co-signer?

The lender’s focus is mainly centred around a co-signer’s income coupled with a decent credit history. Some people think that if they have tons of equity in their home (high net worth) they will be great co-signers. But if they are primarily relying on CPP and OAS while living mortgage free, this is not going to help you qualify for a mortgage.

The best co-signer will offer strengths you currently lack when filling out a mortgage application on your own. For instance, if your income is preventing you from qualifying, find a co-signer with strong income. Or, if your issue is insufficient credit, bring a co-signer on board who has healthy credit.

Co-signer options

There are typically two different ways a co-signer can take shape:

  1. The co-signer becomes a co-borrower. This is like having a partner or spouse buy the home alongside a primary applicant. This involves adding the support of another person’s credit history and income to the application. The co-signer is placed on the title of the home and the lender considers this person equally responsible for the debtif the mortgage goes into default.
  2. The co-signer becomes a guarantor. In this scenario, he/she is backing the loan and vouching you’ll pay it back on time. The guarantor is responsible for the loan if it goes into default. Not many lenders process applications with guarantors, as they prefer all parties to share in the ownership. But some people want to avoid co-ownership for tax or estate planning purposes (more on this later).

gifting moneyNine things to keep in mind as a co-signee

  1. It is a rare privilege to find someone who is willing to co-sign for you. Make sure you are deserving of their trust and support.
  2. It is NOT your responsibility to co-sign for anyone. Carefully think about the character and stability of the people asking for your help, and if there is any chance you may need your own financial flexibility down the road, think twice before possibly shooting yourself in the foot.
  3. Ask for copies of all paperwork and be sure you fully understand the terms before signing.
  4. If you co-sign or act as a guarantor, you are entrusting your personal credit history to the primary borrowers. Late payments hurt both of you, so I recommend you have full access to all mortgage and tax account information to spot signs of trouble the instant they occur.
  5. Understand your legal, tax and even your estate’s position when considering becoming a co-signer. You are taking on a potentially large obligation that could cripple you financially if the borrower(s) cannot pay.
  6. A prudent co-signer may insist the primary applicants have disability insurance protecting the mortgage payments in the event of an income disruption due to poor health. Some will also insist on life insurance.
  7. Try to understand upfront how many years the co-borrower agreement will be in place, and whether you can change things mid-term if the borrower becomes able to assume the original mortgage on their own.
  8. There can be implications with respect to your personal income taxes. You may accumulate an obligation to pay capital gains taxes down the road. This should be discussed this with your tax accountant.
  9. Co-signing impacts Land Transfer Tax Rebates for first-time homebuyers. The rebate amount is reduced based on the percentage of ownership attributed to the co-signer.

Tips from a real estate lawyer

broker tipsWe spoke with Gord Mohan, an Ontario real estate lawyer, for unique insights based on his 22 years of experience.

“The cleanest way to deal with these situations is for the third party (which is typically a parent) to guarantee the main applicant’s mortgage debt obligation,” Mohan says. “This does not require the guarantor to appear on the title to the property, and so it prevents most later complications.”

Following are five key suggestions from Mohan:

  • Co-signers should seek independent legal advice to ensure they fully understand their obligations and rights.
  • All parties should have updated wills to address their intentions upon death and give their executor clear direction with respect to their ownership.
  • Many co-signers try to minimize future tax impact by opting for 1% ownership and having a private agreement that the borrowers will indemnify them or make them full owners if there is a tax bite down the road.
  • Some co-signers try to avoid future tax consequences completely by having their real estate lawyer draw up a “bare trust agreement”, which spells out that the co-signer has zero beneficial interest in the property.
  • A bare trust agreement can come in handy for the Land Transfer Tax (LTT) rebate,enabling the co-signer to apply for a refund from the Ministry of Finance – LTT bulletin.

Source – Canadian Mortgage Trends – ROSS TAYLOR 

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Only buyer, specific relatives can be on title for HST rebate

HST rebates on a home purchase have specific rules and include who can sign as a buyer.

DREAMSTIME PHOTO

Having her uncle on title to get financing disqualifed an Oakville woman for federal rebate

HST rebates on a home purchase have specific rules and include who can sign as a buyer.

Back in June 2011, Angela Maria Henao and her aunt signed an agreement to buy a new house on Quetico Cres. in Oakville. With the June 2012, closing date approaching, Henao and her aunt discovered they were unable to qualify for the required $472,000 mortgage financing.

The purchase agreement was then amended by replacing her aunt as one of the buyers with her uncle, Carlos Restrepo. At the insistence of the bank, he had to be registered on title as an owner. Henao would have been the only buyer if she had qualified for the financing by herself since it was to be her house.

After closing, the Minister of National Revenue refused to allow Henao the HST new homebuyer’s rebate, which I estimate to have been about $24,000.

Henao lived in the house as her primary place of residence. Her uncle never lived there, never made any mortgage or other payments and never expected to receive to receive any proceeds of the sale when the house is sold.

The uncle was clearly on title only as a straw buyer so that his niece could secure mortgage financing. There was no formal trust agreement in which the uncle would have declared he had no interest in the property, but that was in fact their arrangement.

Henao appealed the denial of her HST rebate to the Tax Court of Canada and the court’s decision was released at the end of March. The only issue for the court to decide was whether she was entitled to the rebate.

The law in this area is complex, and in cases like this one, unfair to unsuspecting purchasers. On the sale of every newly constructed home or condominium, the purchase price is subject to HST. The sale price in a builder offer assumes that the purchaser will live in the house and is eligible for the HST rebate.

If the buyer is not eligible, the rebate is added to the builder’s purchase price.

In order to qualify for the HST rebate, the house or condominium must be acquired for use as the primary place of residence of the titled purchaser or a specific category of relative.

Without losing the rebate, title may be held by the buyer jointly with a specific blood relation, including a child and grandchild, a brother or sister, and relationships by marriage or common-law partnerships — even if the relative doesn’t live in the house.

Unfortunately, aunts, uncles, cousins, nephews or nieces and others are excluded from eligibility.

This means that if just one of the buyers does not qualify, even as the owner of a one per cent interest in the property, none of the buyers can get the rebate. All of the buyers must qualify, not just most of them. There is no percentage allocation.

The amount of the lost rebate can be substantial. The federal portion of the rebate is 36 per cent rebate of five per cent of the price, up to a maximum of $6,300 for homes or condos costing $350,000 or less. The rebate gradually drops to zero on homes priced between $350,000 and $450,000.

In addition, there is a rebate of 75 per cent of the eight per cent provincial portion of the HST on the purchase price, up to a maximum of $24,000.

In the case of Angela Henao, Justice Kathleen Lyons ruled that since Carlos Restrepo did not intend to live in the house as his primary residence, and since as the owner’s uncle he was not exempted as a blood relative, both he and his niece were not entitled to the rebate.

In her ruling, Justice Lyons acknowledged the consequences of her decision. “While it is unfortunate that the legislation disentitles (Henao) from the Rebate, it is for Parliament — not the Court — to remedy the situation.”

Homebuyers’ and moving advice

Next month is the busiest month of the entire for real estate transactions year in Canada. Give yourself some breathing room and try not to schedule your transactions for May 1, 15 or 30 — that’s when movers are typically booked solid and could charge you premium rates for a regular moving job.

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Bob Aaron is a Toronto real estate lawyer. He can be reached at bob@aaron.ca , on his website aaron.ca, and Twitter @bobaaron2.