Definition of Guarantor

A guarantor is a person (or company) that takes legal responsibility for a debt, should the owner default on the debt. In real estate, a guarantor is someone who does not live in or own the property but will guarantee to pay for the owner’s debt in case of default on payments. People who have poor credit scores, limited credit history or are seen as a financial liability to lenders are typically required to get a guarantor in order to get approved for a mortgage loan. 

Why is this term important?

Guarantors are people or legal corporations who use their good credit scores to help another borrower to obtain a mortgage loan. A guarantor must be over the age of 18, a resident of Canada, have no legal interest in the property (so they cannot be on Title for the property), have a good credit score and a good income or debt service ratio. 

If the owner of the debt defaults on payments, the guarantor is legally required to cover the debt. Because the guarantor is responsible for any default, their credit score and financial situation must also be considered when a borrower is applying for a mortgage loan.

Prior to signing on as a guarantor, it is a good idea for the loan applicant and the potential guarantor to come up with a payment plan or debt repayment plan should the loan owner default. If the guarantor cannot cover the monthly payments or interest incurred from late payments, the assets that they had listed as security must be used to cover the debt owed.