When and why do banks ask for co-singers on a mortgage?

Good question!

When the bank is deciding whether or not to lend you money to purchase or refinance a home, they look for three main elements: 1. Down payment (or equity in the home if refinancing). 2. Credit score/history (this shows your track record of paying bills on time). 3. Income (your ability to AFFORD the mortgage payments.

Sometimes one or more of these elements are missing from your financial situation. In some cases, the element is missing and you legitimately cannot afford the mortgage or you have not saved up the down payment or you do not have enough equity in your home. In those cases, you cannot afford the mortgage or you have just not saved up enough money. You are not ready to purchase a home.

However, there are some other cases where you have saved up the down payment, you have good credit, and you have excellent income, but the income is not useable because of different reasons such as you are self-employed, and not declaring the income to the government. Or in other cases you may do business in cash only and again, you do not declare the income to the government. The banks can only use declared income (with some exceptions).

Another common example for being declined for a mortgage is thin credit. What is thin credit? Thin credit means that you have very few different trades on your credit bureau. For example you may have only one credit card or one loan. You may pay said credit card or loan on time and perfectly, but you just do not show enough activity because it is only one card. Another reason that you may be declined due to credit is because you have not used your credit long enough. The banks want to see history of payments and depth.

In those cases, our clients may have perfect ability to afford and pay for a mortgage but they just cannot make that leap currently of getting approved themselves. In these cases a lender may ask for a co-signer, co-borrower or guarantor. The banks want somebody to vouch for the borrowers.

A co-signer or co-borrower goes on title with the other buyers so they own a stake in the home. A guarantor doesn’t go on title, they just guarantee that the borrowers will make their payments.