Many young Canadians hoping to buy a home are discovering that their home ownership dreams may be out of reach. Naturally, parents may want to make their children’s home ownership dream a reality by co-signing or guaranteeing their children’s mortgage. However, there are some important factors parents should consider before they agree to co-sign their child’s loan:
- 1. The parents’ situation. While parents may want to be generous with their children, it may not fit their situation. Parents should ensure that their willingness to help their children won’t impede their own financial goals.
- 2. The child’s circumstances. It is important that parents understand why their child doesn’t qualify for a mortgage on their own. Does the child have the income to carry the mortgage, as well as home upkeep, and any other financial obligations that come with home ownership? Is their credit an issue?
If parents co-sign a loan, they are on title to the property, sharing legal responsibility if something goes wrong. This means that they are fully liable for the mortgage debt if their child defaults, risking their own credit ratings and borrowing ability in the future.
Fortunately, co-signing or guaranteeing a loan are not the only options available to parents. Parents may also choose to “gift” funds, which may put in the qualifying ratios more in-line if that’s the issue. Gift funds may also be used to top up a down payment to 20%, allowing them to avoid paying for mortgage default insurance.
The best thing you can do is seek professional guidance, and ensure that all parties are protected. This is an important decision for both parents and their children, one that cannot be taken lightly by either party.
A mortgage broker will be able to go over your individual financial situation, and help you decide the best solution for your circumstances.
Call me today to find out which options are best for you!