If a buyer can’t obtain a mortgage due to poor credit, employment history, lack of down payment or income, most lenders will consider lending if there is someone to act as co-signor or guarantor for a mortgage. The two options provide different requirements.
So which is best – co-signer or guarantor? People often use the terms guarantor and co-signer interchangeably, but they have very different responsibilities and rights. A co-signor is basically a co-owner – he/she is registered on the title and is equally responsible for payments (although it’s often a given that the co-signor will not make the payments). A guarantor, on the other hand, personally guarantees payments will be made if the original applicant defaults, but he has no claim to the property because he/she is not on title.
Lenders require a co-signor or guarantor for a mortgage for different reasons. A co-signor is used when you need to support income. If the original applicant’s qualifying ratio doesn’t meet the lender’s standards, a co-signor is required to bridge the income gap. A co-signor, because their name is also on the title, must sign all of the mortgage documents and can expect to remain on the title until the applicant qualifies for the mortgage on his or her own. Or, in the case of two spouses, the co-signor might remain on title indefinitely. Keep in mind that removing someone from the title involves legal fees.
A guarantor is usually called upon if the applicant qualifies by income, but has a slight credit blemish or has yet to establish credit. It’s also an option for couples where one spouse is an entrepreneur and they don’t want to risk losing the house should the business go bankrupt — they simply keep that person’s name off the mortgage.
Guidance for guarantors
A guarantor has to be stronger financially than a co-signor because they promise to carry the entire debt should the homeowner default. As a result, guarantors are carefully scrutinized, undergo a credit check and must also disclose assets, liabilities and income.
Therefore, it’s important for guarantors to know all of the circumstances of the person they’re acting for and be confident the applicant will make the payments. Before signing, all guarantors should seek advice from a lawyer who is independent of the real estate transaction.
It’s also smart to secure creditor insurance in case things go wrong. The applicant and guarantor should discuss collateral or come up with a repayment plan up front should the guarantor be called on to cover the debt.
When a guarantor wants out
Some lenders offer early release policies that free the guarantor from obligation (usually after 12 months) if the borrower is up-to-date with payments and has established good credit. Sometimes a guarantor can remain under obligation for several years.
Before agreeing to act on behalf of an applicant, guarantors need to evaluate the time commitment they’re willing to make. If, for example, they want to buy their own home in a few years or take on any major debt, such as a car or boat, they may not qualify because of their guarantor status.
Regardless of whether you wish to be a co-signor or guarantor, for a mortgage you should always consult your mortgage professional at Dominion Lending Centres and a lawyer before acting.