What is the role of a Guarantor?
In the real estate market, some mortgage lenders as well as banks, insist on the borrower to have a personal guarantor. They do this because it strengthens the application by having another individual who can share the mortgage loan and incase of default there would be another borrower who can help with the clearing up payments. A guarantor helps to safeguard the interests of a mortgage lender or bank and to ensure that the repayment of the mortgage loan is made on time. If a borrowing is applying for a mortgage on their own, it is important to note that depending on the borrower repayment history and overall application a mortgage lender or bank may insist on a guarantor be added to the application inorder for the mortgage to be approved. The guarantor here is also required to meet the criteria specified by the institution which would provide the mortgage. Even though the liability is secondary, it is there. And if someone wants to act as a guarantor it is important to note that the mortgage lender or bank should be completely satisfied with the credibility of both the borrower and guarantor overall qualification.
Generally, only individuals can act as guarantors. The guarantor in this matter provides a type of security on the borrower’s behalf to the bank. This being that in case the borrower is unable to repay the loan amount or other dues to the bank the guarantor will make good that shortfall or in other words, pay for them. The guarantor will have to enter into a deed of guarantee, where he or she would have to agree to make the payment required in the event of the applicant failing to pay the dues by the due date.
A guarantor will have to satisfy all criteria relating to credit and income applicable to a borrower. With a guarantor, the mortgage lender or bank puts some sort of a moral obligation on the borrower to repay the loan within a given time. An immediate relative can act as a guarantor in case the policy of the bank permits it.
A guarantor may be insisted on for loans above a specific amount (depending on a mortgage lender or bank policies). Conservative mortgage lenders or banks can insist on a guarantor irrespective of the loan amount. Some require a guarantor in all cases while others insist on a guarantor only if certain criteria are not met by the borrower.
What are the conditions of requiring a guarantor for a mortgage?
Mortgage lenders would ask the borrower for a home mortgage guarantor in various scenarios. Some of them are mentioned below:
- The mortgage amount is beyond the limit as per the lender’s policies
- If the mortgage borrower has a poor history of debt settlement/loan repayment
- They have a low credit score
- The mortgage borrower is involved in a high-risk job
- If the borrower does not meet the minimum monthly income criteria
- If the borrower is residing in a city different from the city where he intends to purchase the property
- Absence of professional qualification in case of a self-employed borrower
The primary reason behind a bank asking the client to have a guarantor for a home mortgage loan is to make sure that the mortgage will be repaid on time even if the primary applicant defaults.
The liability of the guarantor
Usually, the guarantors are parents who are helping their adult child in buying a buy a home or a close family member who knows the mortgage borrower. In the paperwork, the responsibilities of a guarantor are the same as the borrower. They are responsible for 100% of the mortgage amount just as the borrower would be and the guarantor would also need to qualify with the borrower for 100% of the reqested mortgage amount.
For example, if the size of the mortgage being requested is for $500,000 then both the borrower and the guarantor must qualify for the full amount of a mortgage for $500,000.
In case you are not able to cover the requested mortgage amount with a guarantor
A financial crisis can be unfortunate but of you face a situation when you can’t cover the outstanding debt with your income, equity, or if you don’t have enough savings cover the amount then you might want to think about getting a
- Additional guarantor
- Second mortgage
- A gifted down payment
These are all additional options that may help get your mortgage application approved.
Now let’s have a look at the benefits of getting a Guarantor
Signing a guarantor might sound risky, but there are some benefits as well. Here are some of them for you to read about.
- If you are signing a guarantor, it means you will always have the drive and responsibility to pay your monthly mortgage payments on time so the guarantor won’t have to pay for it
- Your credit score could also improve if you’re making your payments on time
- You will have a better idea of how to manage your monthly expenses
The difference between a consignor and a Guarantor
A guarantor differs slightly from a co-signer, especially if it comes to a secured loan which involves collateral, such as a mortgage. We can use a mortgage as an example here. In a guarantor contract, the guarantor’s name is not on the home title and doesn’t have the same property rights as a co-signer would. The guarantor’s name would only on the mortgage and not on the property’s title. His or her role is to guarantee that the mortgage payments will be made monthly in order to ensure loan approval.
On the other hand, a co-signer, will their name on the title of the home (in case of a mortgage). Guarantors are usually liable for default only when the lender has done everything possible to get the primary borrower to make the payments.
The responsibility of a guarantor is to make loan payments if you as a mortgage borrower are not able to. Should the mortgage borrower file for bankruptcy, stop making payments, or pass away, the guarantor would then become responsible for each monthly payment until the loan has been completely repaid in full.
Want to become a Guarantor?
If you want to become a guarantor, you should understand the risks and responsibilities that come with it. Here are some questions you should ask yourself before you take up the role:
- Do you trust the borrower to always make their payments on time?
- Can you afford to cover any missed payments?
- Why does the borrower need a guarantor?
- Can you trust the borrower to pay back the loan on time?
- Can you afford to cover the entire cost of the loan?
- Are you worried that being a guarantor for a friend or family member might ruin your relationship?
- Will you have to put up your own assets as security?
- Will being a guarantor affect your ability to secure your loan in the future?
- What is the loan amount that you will be guaranteed?
- Can you take yourself off the contract at some point in the future?
The answers will help you in making a well-informed decision about if you would or would not become a guarantor for someone you know who is not able to secure a loan.
If you are looking into becoming a guarantor on a mortgage for someone then make sure to contact us. We can make sure the help make the process simple and easy as possible and help you get approved, just give us a call. We look forward to hearing from you.