Buying a home is one of the biggest decisions you will make in life. It is also one of the most costly, as you need to save lots of money to afford a decent property. Most homebuyers have no choice but to apply for a home loan. Even then, the process can be complicated, particularly if they cannot fulfill certain requirements to qualify and get the mortgage approved.
If you have a low credit score or a shaky financial history, chances are your application for a home loan will be rejected. In this case, having a mortgage guarantor may be what you need. A guarantor for a mortgage will back up your loan by agreeing to fulfill payments and take over in the event that you default.
What is a Guarantor Mortgage?
A guarantor mortgage is a type of loan that requires a guarantor to co-sign a loan contract. This is a way to secure a mortgage when you lack the required deposit or when your financial history prevents lenders from approving your loan. A guarantor mortgage is sometimes called a family assisted mortgage, where a parent or close family member agrees to help and take the risks.
A guarantor mortgage is recommended if a borrower is a first-time homebuyer, with small or no deposit. This also applies if you have a low income and low to non-existent credit score. If you want to buy a property, but your lenders or mortgage loan aggregators calculate that it costs more than what you can afford, then this type of loan may be the answer to your problem.
What is the Difference between a Guarantor and a Co-signer?
A guarantor differs from a co-signer in several significant ways. While both can help unqualified individuals secure a mortgage, their rights and responsibilities are distinct. A co-signer is required to sign mortgage documents, so their name will appear on the property title. In essence, they co-own the home with the mortgagor and will be held accountable for any outstanding payments stipulated in the contract.
Unlike a co-signer, the name of a mortgage guarantor will not appear on the title of the home. This means that while they are responsible for covering the payments, they will not actually own the home even when the original mortgagor defaults. While a co-signer is used when an applicant fails to qualify due to major problems like income issues, a guarantor comes in only to give a boost and satisfy the lending criteria of an applicant on the verge of qualifying.
To give a more concrete example, a co-signer is needed if the borrower has an unverifiable source of income, like self-employment, but may be able to pay the loan easily. Meanwhile, a mortgage guarantor is brought in if the applicant qualifies income-wise, but has problems with credit. This often happens for young individuals looking to buy a home for the first time and do not have any credit with banks.
How Do I Choose my Guarantor?
Some lenders have strict requirements that you have to follow when applying for a guarantor loan. Your mortgage guarantor Canada must satisfy the standards set if you do not want your application to be rejected right away. Technically, they must be in better financial standing than co-signers, must have a stable income and a job.
A guarantor for a mortgage must have a steady source of income to cover the cost of loan repayments if required. Lenders also check if they have adequate savings and a stable job, backed by relevant documents to be submitted by the guarantor. Having a strong credit record is also a requirement. Typically, a credit score of 650 or higher is needed to qualify.
Owning a house as part of a legal guarantee will also eliminate the lender’s worries regarding flight risks. Some lenders require a guarantor to be a Canadian resident or have lived in the country for a certain period of time. Your mortgage guarantor Canada also has to present a government-issued ID showing they are over 18 years old.
What are the Potential Risks of Being a Guarantor?
Signing a mortgage as a guarantor is not a decision to be taken lightly. You have to know your mortgage guarantor rights or run the risk of paying thousands of dollars if the primary borrower decides to bail out and leave you to clean the mess. It is important that a contract is designed to protect the guarantor from getting stuck paying defaulted loans for years.
In a worst-case scenario where a guarantor has to pay all loan repayments and it is tied to a mortgage, there are two possible outcomes and both are unappealing. Either the guarantor remortgages their own property or has it repossessed to cover the damages. Moreover, their credit score will suffer when repaying loans.
There is a reason why lenders prefer immediate family members, like parents and siblings, to be the guarantors in these arrangements. Some also allow extended families and ex-spouses. Considering their familial ties, they are less likely to run from their responsibility as guarantors. Family or not, it is best to seek advice before agreeing to sign any loan guarantee.
When Should I Agree to Become a Guarantor?
If someone you know asks you to become a guarantor for a mortgage, consider the following questions. Your answers will help you make an informed decision about whether to agree or not, considering all the risks involved. Always keep in mind that in being a guarantor, you are agreeing to be liable for someone else’s debt.
Do you trust the borrower to pay back the loan on time?
Can you afford to cover any outstanding payment, in case of default?
How much is the loan that you will be guaranteed?
Can you get yourself out of the contract at some point in the future?
Will being a guarantor affect your ability to secure your own loan later on?
If you are in the right financial position to be a guarantor for someone you know who needs your help, by all means, be one. Just be cautious. Know your mortgage guarantor rights. Read the contract thoroughly before signing. If you need to, speak with a mortgage broker who will act in your best interest and ask them to explain all of your options.