Understanding Co-Signers & Guarantors
For younger people and first-time homebuyers, trying to compete independently in Vancouver’s out-of-control-and-ceaselessly-rising real estate market can be next to impossible. As a result, at some point those wanting in may consider alternative lending options; a process which quite often leads back to a parent or family member who is willing to co-sign or gift the down payment. But what happens if that person is cash poor and asset rich? Is it still possible for your parents to qualify on your behalf with assets or the equity of their home?
They own their home and other rental properties, but have no income… Can home equity be used?
The short answer to this question is no. You need income to qualify for a mortgage or to co-sign a mortgage. Equity lending is a different topic and very few lenders will lend based on equity (amount of down payment or percentage of ownership in the home) and usually reserve those for self-employed borrowers. Of course, more options become available as you start exploring the alternative lending channel. A refinance may be a possible scenario to take equity out and help with a gifted down payment.
Home equity is considered the share of the home that one owns, as opposed to that which they owe to the bank. A great example recently used by MarketWatch goes something like this: let’s say your parents’ home is worth $150,000, but they owe an outstanding amount of $75,000 to their own lender; that becomes $75,000 in equity. Further explained, this is known as a loan-to-value ratio (in this particular example they owe another $75,000 which is 50% of the total property value). The maximum loan amount that a lender would allow for a refinance would be 80% loan-to-value ratio, which means you’ll need to own more than 20% of your home before you can even take equity out. Whatever the difference is to 80% minus your existing mortgage would be the maximum amount you can withdraw in terms of equity, given that the borrower qualifies for the additional mortgage amount.
In greater Vancouver, values have soared and a lot of people who have been in their home for many years will have quite a bit of equity built up unless they have recently refinanced.
You found a co-signer but they are retired, will this work?
Fortunately we can use both CPP and OAS to income qualify. However, when a co-signer or guarantor goes into the application, his or her own living expenses must also be factored in. If there are no mortgage payments, the lender will still calculate property tax and strata fees if applicable. If they are living rent free with other family members and essentially have no expenses the lenders will still factor in a monthly living allowance ranging between $600-750 per month. The way the lender sees it, their living situation can change and if so, they need to be able to afford a place to live. If the borrower is at a lower income level, this monthly living expense can push them over the maximum ratios therefore not allowing them to be a co-signer.
What about Liquid Assets?
If your co-signer has significant capital in investments and collects a healthy ROI, your lender can use a two-year average of their investment income. The amount of investments helps to strengthen the application, but it’s still the income generated from those investments that is used.
Before being sure that your family member can co-sign for you, it’s better to discuss their situation with them and learn about their financial responsibilities. If this is an awkward conversation to have, perhaps your broker can get the information as a third party person.
Oftentimes people bank on their asset or equity rich family member to help them qualify for a mortgage. The rules have changed quite a bit and income has become more of an important qualifying factor. If you are looking for someone to help you with getting a loan, think of his or her income, credit and assets complementing and adding to your application. If this is not the case, they will be unable to help you in the process
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