Getting mortgage approval is often difficult for borrowers with poor credit, insufficient income, the lack of a down payment, or an employment history that shows a lot of movement. However, if you have someone who will act as a guarantor or a co-signor for your mortgage, you can improve your odds with a bank significantly.
A lot of people use the terms “guarantor” and “co-signor” as though they mean the same thing, but the roles are actually quite different. If someone acts as our co-signor, his name goes on the title as well, and he shares the legal responsibility for making the payments. A guarantor has put down a personal guarantee if you default on the payments, but his name does not appear on the title, so he has no right to the property.
There are several reasons why banks might require a guarantor or co-signor. If you need to boost your income, a co-signor can cover the gap. This person also has to come to closing and sign all the mortgage paperwork because his name appears on the title as well, until the borrower qualifies for his own loan and can take over the note.
If the borrower has enough income to qualify but has other issues, such as a lack of credit history or credit that is less than stellar, a guarantor can come in and make the lender happy by boosting that overall credit score.
Advice for guarantors
If someone has asked you to be a guarantor, you need to have a strong financial position – because you are promising to satisfy the whole debt for the mortgage if the borrower defaults. If you agree to serve as one, the lender will look closely at your credit, and you also have to disclose your income, assets and liabilities.
Because you’re considering taking on such a huge potential liability, you need to trust the person for whom you are acting as guarantor – particularly in their ability to make the payments each month. We recommend that anyone considering acting as a guarantor talk to a lawyer about all of the obligations – a lawyer who is outside the transaction.
Just in case things do go into default, the guarantor and borrower should have an agreement in place regarding collateral or a repayment plan.
If the borrower has made payments on time for a year and has improved his credit sufficiently, some lenders have policies that allow the guarantor to step out of the obligation. This is a question that you will want to go over with the lender before signing any paperwork. Your guarantor status appears as debt on your own credit report, so make sure that you can handle that impact if you want to buy a home or a car in the time period when you will be a guarantor.
If you have any other questions about this process, contact Amansad Financial – and also reach out to a real estate attorney to get independent legal advice pertinent to your own situation.