What is a Mortgage Guarantor?

WOWA Simply Know Your Options

If you're struggling to qualify for a mortgage in Canada due to a limited credit history or income verification issues, this guide explains how adding a mortgage guarantor to your application can help and whether it might be right for you.

Despite years of saving, most Canadians still require a mortgage to purchase a home. Although ownership costs have somewhat eased from their peak in 2022, home prices in major housing markets like the Toronto housing market and the Vancouver housing market remain significantly high, making it difficult for some buyers to get mortgage approval. Some homebuyers may need additional support to qualify, which is where a mortgage guarantor can help. By providing added assurance to the lender, a guarantor can strengthen the homebuyer's application, particularly for borrowers with lower credit scores or inadequate income.

A guarantor signs a guarantee document as part of the mortgage agreement, agreeing to make the mortgage payment if the primary borrower fails to do so. This reduces the risk for the lender, increasing the chances of approval. Usually, a guarantor is liable for making the payments only after the lender has exhausted all other collection avenues. Oftentimes, a guarantor helps secure a mortgage for borrowers who have adequate income and are capable of making payments but cannot be approved due to other reasons, such as credit problems.

Guarantors can help secure mortgage approval for borrowers who are financially able to make the monthly payments but require additional support on their application due to scenarios such as:

• Low credit scores: Some borrowers may be rejected only because of their low credit scores. Oftentimes, this may be because the borrower is new to Canada or has insufficient credit history as they are young. Such borrowers may be easily approved by adding a guarantor to the application.
• Not enough down payment: If a borrower has enough income but struggles to meet other lending criteria, a guarantor can support the application. However, a guarantor does not reduce Canada's minimum down payment requirements (5%–10% for insured mortgages, or 20% for homes priced $1.5M+). The borrower must still provide the required minimum down payment from eligible sources.
• Self-employed: Self-employed mortgages can be tricky, as self-employed individuals often face difficulty showing a consistent income in the absence of regular pay stubs. In such a situation, a guarantor with a stable income can help the borrower get approved for a loan.
• Not approved for the desired amount: Some individuals may qualify for a conventional loan but not for the amount they are looking to borrow. They might be able to qualify for a higher mortgage amount by adding a guarantor to the mortgage.
• Newcomers to Canada: A newcomer to Canada with a stable income but limited Canadian credit history or employment history may not be able to qualify for a mortgage. However, adding a guarantor can strengthen a newcomer's mortgage application.

Having a guarantor may also help some primary borrowers bargain the rate of interest on their mortgages.

Both a mortgage co-signer and a guarantor are responsible for your debt if you fail to make payments; however, there are a few key differences between the two. A co-signer is closer to a co-borrower in terms of signing documents, ownership and risk. The table below explains the differences between a guarantor, co-signer and a co-borrower.

A guarantor is usually added to applications where the primary borrower meets the income requirement but has credit issues. Meanwhile, a cosigner is usually required for applications where the primary borrower fails to meet income requirements, often because they don't have adequate documents to prove their income. Guarantors usually need to have a better financial standing than a co-signer.

A mortgage guarantor is usually a spouse, parent, or immediate relative who is willing to take responsibility for the mortgage payments when the primary borrower fails to make the payments. For example, parents may become guarantors for their kids' mortgages, or a sibling may agree to be a guarantor for a mortgage taken by their sibling. A person has to meet some requirements to qualify as a guarantor. The general eligibility requirements for becoming a guarantor are

• Age - They should have reached the age of majority in their province of residence.
• Residency - They must be a Canadian citizen or permanent resident. A lender may require a guarantor to have lived in Canada for a certain period of time to be eligible.
• Credit Score - They must have a good credit score (usually 650+) and a clean credit history. A guarantor with a credit report that has delinquencies or derogatory marks may not be approved.
• Income and Job - They must have a stable job and an income that is enough to cover the mortgage payments in case the primary borrower fails to make payments. In some cases, the lender may approve a guarantor with an insufficient income but a substantial net worth.
• Own a home - Some lenders also require the guarantor to own a house in Canada to ensure they have an established residency in Canada.

A lender typically runs a credit check on the guarantor to ensure the creditworthiness of the guarantor. In addition, the guarantor also has to provide their financial information to the lender, including their income, assets and existing debt.

If you cannot get approved for a mortgage by yourself, a lender may suggest you get a guarantor or a co-signer based on your situation. The following steps can help you get a guarantor for your mortgage application:

1. Find a Guarantor: The first and foremost step is to find someone who is willing to sign your mortgage agreement as a guarantor. This person should be a close friend or a relative with whom you must share mutual trust. The person should have a sound financial background and must be willing to help you. You should also ensure that they are aware of the risks of becoming a guarantor.

2. Find a Lender: The next step is to find a lender that allows a guarantor. While many lenders accept a guarantor, there are some lenders that do not allow for guarantor-backed mortgages. You will have to research different lenders and talk to them about making a mortgage application backed by a guarantor. Alternative lenders generally offer subprime mortgage solutions. You should ask the lenders about the different interest rate options offered by them and inquire if the rate will be different if a guarantor is a part of the agreement.

3. Submit the Mortgage Application and Documents: Once you find a lender and a guarantor, you will have to complete all the paperwork and submit it. You will also have to submit your guarantor's financial documents along with your mortgage documents to prove their eligibility. Documents that are typically submitted include identification documents, paystubs, bank statements, proof of assets, and any other documents that can help prove the financial ability of the guarantor. The lender will use these documents to approve or reject the guarantor.

4. Get the Guarantee Document Signed: Once the guarantor is approved, they will have to sign the guarantee document that legally binds them to repay the mortgage if the primary borrower fails to do so.

While becoming a guarantor for a loved one may help them get a mortgage, it may pose some risks for you. Listed below are the risks you should consider before becoming a guarantor for someone.

• Payment Liability: You may have to make loan payments on behalf of the borrower if they fail to do so. In case of the death of the primary borrower, the liability to repay the loan may fall upon you if the borrower does not have mortgage life insurance or if the policy does not cover you.
• Credit Risk: Some lenders report the mortgage on the guarantor's credit report. In such a scenario, your credit score may be affected if the primary borrower misses payments. You may face issues qualifying for a mortgage for yourself if you are guaranteeing someone else's loan. You should talk to the lender beforehand about their credit report policy before signing as a guarantor.
• Personal Relationships: Your personal relationships may be strained if the primary borrower fails to make payments and you have to cover their loan. A guarantor doesn't have any rights over the property, so you may end up being liable to pay for a home that you don't have any rights over. You must take this fact into account before agreeing to be a guarantor for someone.
• Loss of Assets: Some lenders may require a guarantor to provide collateral to approve the borrower. In such a case, you may end up losing the assets you provide as security if the principal borrower fails to repay the mortgage, and you aren't in a position to cover it either.

If someone has asked you to be a guarantor for them, asking the following questions can help you decide whether or not you should agree to be the guarantor.

• Why does the applicant need a guarantor to get a mortgage?
• Is the borrower capable of paying the mortgage back themselves?
• Do you trust the borrower to make payments on time?
• Are you willing to make payments if the borrower fails to do so?
• Do you have the financial capacity to make the mortgage payments should the primary borrower fail to do so?
• Will you have to provide collateral to help secure the mortgage?
• Will your relationship with the borrower be soured if you have to make payments on their behalf?
• Will the lender allow you to be released from the mortgage if the primary borrower's financial situation improves?
• Will the mortgage be reported on your credit file?
• Can you face issues in securing a loan for yourself in future if you agree to be a guarantor for someone else?

In general, a guarantor is released from a mortgage only when the primary borrower is able to assume the mortgage on their own merit. If the primary borrower's financial situation improves, they can request the mortgage lender to remove the guarantor from the mortgage. It is likely that the primary borrower will have to refinance the mortgage or qualify for a new mortgage in this situation. There may be additional fees for the process of removing a guarantor.

A guarantor can help boost the mortgage application of individuals who meet most of the lending criteria but are not qualified due to some issues. A guarantor is usually a parent, spouse or close relative who is willing to help you by guaranteeing the mortgage payments. That said, being a guarantor is a legal liability, and one must carefully consider the pros and cons of becoming a guarantor before agreeing to be one.