A guarantor or co-signer can help secure the financing to either purchase or refinance a home.
People often use the terms guarantor and co-signer interchangeably, but each has very different responsibilities and rights.
A guarantor or co-signer would be required if the applicant is not able to obtain a mortgage approval independently because of a poor credit rating, inadequate down payment, insufficient employment history or questionable income.
Most mortgages will be approved if there is someone to back the borrower should he/she have any trouble making the payment.
A co-signer is basically a co-owner being registered on title and equally accountable for the payments, although it is commonly understood that he/she will not make the payments.
Co-signers are typically used when you need to support the income of the mortgage applicant.
The co-signer will go through the typical application procedure of a credit check and disclosure of all assets and liabilities as well as employment information.
Co-signers must sign all of the mortgage documents and can expect to remain on title until such time as the applicant qualifies for the mortgage on their own.
So a co-signer is a co-owner.
A guarantor personally guarantees the payments will be made if the original applicant defaults.
The guarantor has no claim to the property because he/she is not on title but as guarantor he/she does sign the mortgage documents.
A guarantor has to be stronger financially than a co-signer because that individual promises to carry the entire debt should the homeowner default.
During the mortgage application process, a guarantor will undergo a credit check and must disclose assets, liabilities and income.
It is a huge responsibility for a guarantor to take on as that individual will have fewer rights than a co-signer.
While their obligation is the same as a co-signer, they don’t have the luxury of being on title so they don’t have a claim to the property.
If the homeowner defaults on the payments and the situation deteriorates to the point that the homeowner can’t meet his/her obligations, the home will usually be sold and the guarantor will be responsible for the missed payments as well as any loss associated with the sale.
Most lenders will offer early release policies that free the guarantor from obligation (usually after 12 months) if the borrower is current with payments and has established good credit or employment history.
Before agreeing to act on behalf of an applicant, both co-signers and guarantors need to evaluate the time commitment they are willing to make.
For example, if they wish to purchase their own home in a few years or take on any major debt such as a car or boat loan, they may not qualify because of their commitment as a guarantor or co-signer.
