Mortgage approval can be difficult especially for a buyer who doesn’t meet all of the ideal qualifications. For most lenders, a borrower will need to show a steady, reliable income stream, a low debt threshold and excellent consumer responsibility (this last bit is measured by your credit score).
Those of us with poor credit scores, a lack of credit history or a lower gross income are often denied the opportunity to prove that we will be responsible homeowners and consistently pay down our mortgage debt. However, just because you can’t get a conventional mortgage, doesn’t mean you can’t become a home owner. One option is to get a mortgage through an alternative lender, but that often means paying significantly higher interest rates. Another option is to ask someone to help by becoming your guarantor or co-signer. However, before signing anything, mortgage professional Atrina Kouroshnia encourages all involved parties to understand the differences between a guarantor and a co-signor and to recognize the risks and rewards of both. “It is a huge responsibility to take on,” explains Kouroshnia.
What is a co-signer?
A co-signer will be listed as a titleholder of the property — which essentially means this person is a co-owner of the home. Since co-signers are legally registered as an owner of the property, they are liable for mortgage payments, which means if you miss a payment, your co-signer will be held responsible and will have to make any missed payments to the bank in order to avoid foreclosure on the property.
Like the main applicant, a co-signer must sign all legal documents pertaining to the property and the only way for a co-signer to be removed from the property title and mortgage loan is if the applicant can qualify for the mortgage on their own at a later date. Also, keep in mind that the only way to remove a co-signer from legal ownership of a property is to pay legal fees associated with this transaction.
What is a guarantor?
Like a co-signor, guarantors make a guarantee to lenders that if the main applicant cannot make a mortgage payment, they will cover the payments. However, unlike co-signers, guarantors are not listed as a titleholder and are not co-owners of the property. Therefore, if mortgage payments are missed, and you are unable to contact the property owner, you will still be liable to make these payments without having any right to the land. Not only would you have to make these mortgage payments, your credit score and report would also be affected by these delinquencies.
Guarantors are typically used for mortgages when an applicant does not have a credit history or has delinquencies on their credit report.
Most guarantors prefer to seek legal advice before signing onto a mortgage due to the risk level. These delinquencies could affect their plans to borrow money from lenders or to buy property at a future date.
Is it a good idea to sign on as a guarantor or co-signer?
Anyone considering becoming a guarantor or co-signer should weigh all of the risks that go along with this responsibility. Although it may seem that yourself and the main borrower are equally responsible for the loan with a 50/50 share in the property, it’s important to recognize that the lender sees you as both being 100% responsible for these payments.
“When you are guaranteeing or co-signing a loan, it affects your overall borrowing ability and this can hinder future plans,” says Kouroshnia.
Kouroshnia also reminds those considering this route that guaranteeing or co-signing another person’s mortgage loan can seriously affect your credit and leave you vulnerable.
The main difference between a guarantor and a co-signer is that the co-signer is a titleholder and a guarantor is not. However, both of these individuals are responsible for mortgage payments being made to the lender.