Despite saving for years to buy a home in Canada, most Canadians have to take a mortgage to be able to afford a home. In the current scenario, where high home prices and high mortgage rates have compounded unaffordability, it has become increasingly difficult to get mortgage approval. Some homebuyers may require help in qualifying for a mortgage, and that’s where a mortgage guarantor could lend a hand. A guarantor could help homebuyers meet the lending requirements despite having low credit scores or inadequate income.
A guarantor mortgage is a mortgage in which a guarantor signs a guarantee document as a part of the mortgage agreement. The guarantor reduces lender risk by agreeing to make the mortgage payment if the primary borrower defaults on the loan. A guarantor is usually 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 a good income and are capable of making payments but cannot be approved due to other reasons, such as credit problems.
Guarantors can often help get mortgage approval for borrowers who are capable of making their monthly payments but need aid due to the following reasons:
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. The table below outlines the key differences between a guarantor and a co-signer.
|Added to the mortgage agreement but is not listed on the property’s title.||Added to the mortgage agreement and is also listed on the property’s title.|
|Required to sign the guarantee document.||Required to sign all the mortgage documents.|
|Does not have any right over the property.||Has partial ownership of the property.|
|Typically liable for the debt when the primary borrower falls into default, and the lender has no other means of recourse left.||Responsible for any payments missed by the primary borrower.|
|Generally used when the primary homebuyer has a relatively strong application but needs a slight boost.||Usually required when the primary homebuyer has a weak application requiring significant aid.|
|Not all lenders allow a mortgage guarantor.||Most lenders allow a mortgage cosigner.|
|Payment defaults may or may not affect the guarantor’s credit scores.||Payment defaults will have an impact on the cosigner’s credit scores.|
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.
Joint mortgages also involve multiple parties but differ from a guarantor or a cosigner arrangement. In a joint mortgage, all the borrowers are co-owners of the property and are equally responsible for making the mortgage payments. In a joint mortgage, the financial resources of multiple individuals are combined to qualify for a mortgage. Meanwhile, guarantors and co-signers take responsibility for the mortgage payments only to help the principal borrower qualify.
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
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.
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.
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.