Co-singing for a mortgage vs a Guarantor
Today’s first time home buyer help tip we will look at the difference between a co-signor and a guarantor for a mortgage.
If a buyer is unable to qualify for a mortgage due to poor credit, employment history, lack of down payment or income — most lenders will still consider lending if there is someone that the borrower can find who is willing to act as co-signor or guarantor for a mortgage.
These two options have different requirements.
A question we often get asked is which is best, a Co-signer or a guarantor?
The truth is people often use the terms guarantor and co-signor interchangeably, but they are not the same. In fact, co-signers and guarantors have different responsibilities and rights.
A co-signor is basically a co-owner of the property being purchased – he/she is registered on the title of the property and is equally responsible for payments (although it is often understood that the co-signor will not make the payments- however if the borrower fails to make the payments, the co-signor will be responsible to make up the short fall). 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.
In both cases, if the borrower cannot make the payments, then the co-signer as well as the guarantor will be called upon to make the payments, however the guarantor does not have any interest in the actual property, where the co-signer does.
Lenders require a co-signor or guarantor for a mortgage for different reasons. A co-signor is typically 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 title until the applicant qualifies for the mortgage on his or her own. It is important to keep in mind that when removing someone from the title it involves additional legal fees.
A guarantor is usually called upon if the applicant has enough income to qualify, but has a slight credit blemish or has yet to establish sufficient credit. In the cases where there are spouses, certain lenders allow one to go on as a guarantor, for strategical purposes, such as in BC, there is a property transfer tax. So if you have a husband and a wife that are both first time home buyers, this strategy allows them to “save” one of their first time home buyer statuses. The idea is that it could potentially save them some money down the road, in the form of savings on the property transfer tax.
A guarantor situation is 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 — in this case they are simply off the title of the property.
Some guidance if you are considering going on as a guarantor
Typically, a guarantor has to be stronger financially than a co-signor because in essence they to carry the entire debt should the homeowner default. As a result, guarantors are carefully scrutinized and undergo a credit check and must also disclose assets, liabilities and income.
In the case of a co-signor, both co-borrowers are deemed equally responsible, so their income is combined to qualify for the entire debt load. The guarantor must qualify for not only their own debt but also for the entire debt load of the borrower(s) on their own steam.
As a result, it is important for guarantors to know all of the circumstances of the person they are acting as guarantor for and be confident the borrower will make the payments. Before signing, all guarantors should seek advice from a lawyer who is independent of the real estate transaction. In fact, pretty much every single lending institution requires this in today’s market.
It is also prudent to secure creditor insurance in case things go not so according to plan. Ideally, 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.
What happens 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 a good credit rating. Sometimes a guarantor must remain under the obligation for several years.
Before agreeing to act on behalf of an applicant, as a guarantor you need to evaluate the time commitment you are willing to make. If you want to buy their own home in a few years for example or take on any major debt, such as a car or boat, you must be aware that you may not qualify because of your guarantor status.
As a rule of thumb you should always consult your mortgage professional or lawyer first before acting regardless of whether you wish to be a co-signor or guarantor for a mortgage.