If you have trouble qualifying for a mortgage on your own, know that not all is lost: adding a guarantor or a co-signer to your mortgage application can increase your eligibility and potentially help you secure a larger loan amount or lower interest rates.
In this post, we’ll explore the similarities and differences between a mortgage guarantor vs. co-signer, which one is right for your situation, and how they can help you purchase the home of your dreams.
Understanding Mortgage Guarantors and Co-signers
The role of a mortgage guarantor or co-signer is to assure the mortgage lender that the payments will be covered in full and on time, even if you can’t meet them yourself. However, it is important to note that these parties take on significantly different roles in the mortgage and homeownership process:
What is a Mortgage Guarantor?
A guarantor is an individual who is responsible for covering the borrower’s mortgage payments in case the borrower defaults on their loan. In essence, guarantors use their assets as collateral against the mortgage. They typically reside in the home and are listed on the mortgage loan, but they are not listed on the home’s title and don’t have property rights or access to home equity.
While mortgage guarantors do take on some risk, they only become liable for default after the lender has exhausted all other ways of collection against the main borrower. In case a guarantor dies, their estate may be held responsible for mortgage payments.
What is a Mortgage Co-signer?
A mortgage co-signer takes on significantly more responsibility than a guarantor. That’s because a co-signer becomes equally responsible for mortgage payments as the main borrower. A co-signer typically resides in the home and assumes its partial ownership, along with mortgage liability: their name must be registered on the home’s title and appear on all mortgage documents.
If the borrower defaults, the co-signer must take over the loan payments. This financial obligation will be reflected in their credit report, regardless of whether they actually contribute towards monthly payments in the first place. In case a co-signer dies, the liability for the mortgage will be transferred to the remaining co-owners.
Their Roles in the Mortgage Process
Both mortgage guarantors and co-signers can significantly strengthen a primary borrower’s loan application, especially when the borrower doesn’t have the necessary income or credit score required for approval.
- Guarantors offer additional security for a mortgage application without being directly involved in the property purchase. A guarantor may be necessary if lenders are hesitant to approve a mortgage due to the borrower’s financial instability. Their presence can significantly increase the likelihood of mortgage approval and, in turn, secure a reduced interest rate.
- Adding a mortgage co-signer can also increase the chances of mortgage application approval, especially for first-time home buyers. By signing a joint mortgage agreement, co-signers provide lenders with complete assurance of loan repayment, which can result in a higher loan amount or reduced interest rates.
Key Differences Between Mortgage Guarantors vs. Co-signers
While the purpose of a mortgage guarantor and a co-signer are somewhat similar as they both strengthen a mortgage application, it is important to understand that they play very different roles in this process.
Legal Responsibilities and Obligations
- A guarantor’s name only appears on the mortgage loan but not on the home title. This means that a guarantor has no property rights or access to the home’s equity as an asset. Further, a guarantor doesn’t contribute to monthly mortgage payments; their role is to guarantee that payments will be made if the primary borrower defaults.
- On the other hand, the name of a mortgage co-signer appears on both the home’s title and the loan. While a co-signer may or may not contribute to monthly mortgage payments, they become a partial owner of the home and partially responsible for the associated mortgage liability.
Credit Implications
- Despite not being directly involved in the property ownership, a guarantor remains an active participant in the mortgage loan. A guarantor’s credit score will not be directly impacted right away, but any missed mortgage payments will negatively affect their credit history.
- Credit implications for mortgage co-signers are even more extensive. Co-signers are directly linked to the mortgage, which impacts their credit and potentially their ability to secure future loans. Most of the time, trusted family members or friends take on the role of co-signers, as they find that helping their loved ones achieve homeownership goals is a significant reward for the potential risks.
Financial Liability
- A mortgage guarantor becomes liable for default after all other means of collection against the primary borrower have been exhausted.
- A co-signer will be immediately liable if mortgage payments are in default. This means that a co-signer’s income and assets can be considered collateral if loan obligations are not met.
Impact on Ownership
- A mortgage guarantor’s name does not appear on the home title, meaning they do not own part of the property.
- On the contrary, a co-signer becomes a partial owner of the home, appearing on both the title and mortgage documents.
When to Use a Mortgage Guarantor
Mortgage guarantors act as a safety net and generally need better financial standing than co-signers. Guarantors are typically used when the primary applicant only needs a slight boost in their application. For example, the applicant may qualify for a mortgage based on their income but has a poor credit score. It’s common for younger and first-time homebuyers who have a short credit history to use a guarantor.
When to Use a Mortgage Co-signer
Adding a co-signer to a mortgage application may be necessary when the primary applicant has insufficient income or a weak credit score. Generally, if the applicant is not able to qualify for a mortgage on their own merits, perhaps because of inconsistent income, a co-signer may be required to bridge that income gap.
The Application Process for Guarantors and Co-signers
The exact application process for a mortgage guarantor or a co-signer may vary depending on the specific lender involved and the nature of the mortgage agreement. However, general documents and requirements remain similar from lender to lender.
What Lenders Look for in Guarantors
Not all lenders allow using a guarantor, or they may have specific requirements varying on a case-by-case basis. In general, the eligibility criteria for becoming a mortgage guarantor are:
- Age: A guarantor must reach the age of majority in their province of residence.
- Residence: A guarantor must be either a Canadian citizen or a permanent resident.
- Homeownership: In some situations, a lender may require the guarantor to own a house in Canada to prove their residency.
- Job and Income: A guarantor must have a stable job, and their income should be enough to cover mortgage payments if the primary borrower defaults.
- Credit Score: A guarantor must have a clean credit history and a strong credit score, usually 650 or higher.
What Lenders Look for in Co-signers
Most lenders will allow the addition of a co-signer to one’s mortgage application. The eligibility criteria are similar to that of a guarantor: co-signers must have excellent credit, a steady income, and demonstrate that they can cover mortgage payments in case the primary borrower fails to do so. Unlike guarantors, lenders pay special attention to a co-signer’s debt-to-income ratio, which must be within acceptable limits to gain application approval.
Legal Agreements and Documentation
Once placed on the mortgage application, guarantors and co-signers will undergo a credit review and financial assessment to determine their capability to cover loan payments if necessary. They will also be asked to provide proof of income, such as tax returns, pay stubs, or other relevant financial documents.
Furthermore, both guarantors and co-signers must consent and sign final mortgage documents, as both parties are included in all mortgage documentation. In addition, all mortgage co-signers will be added to the home’s title.
Risks and Considerations
While mortgage guarantors and co-signers offer primary applicants support, both assume some risk in return.
Risks Faced by Guarantors
Becoming a mortgage guarantor is generally less risky than becoming a co-signer. Even though the guarantor is still responsible for missed mortgage payments, they will only become liable once the lender has tried and failed to collect their funds through all other means.
Plus, as long as the primary borrower makes all payments on time, mortgage defaults won’t appear on the guarantor’s credit report.
Risks Faced by Co-signers
If the primary borrower fails to make a mortgage payment, the lender will immediately pursue the co-signer to collect any outstanding amounts. In this situation, the co-signer will become fully responsible for the quantity owed, risking their assets and income.
In addition, by co-signing the mortgage, the co-signer is taking on an ongoing financial obligation, which will be reflected on their credit report. This may negatively impact the co-signer’s ability to independently receive additional loans or a mortgage.
Exit Strategies and Precautions
Signing a mortgage as a guarantor or co-signer should never be taken lightly, as it may be challenging to have one’s name removed from the mortgage deed.
Lenders rarely release guarantors and co-signers from their mortgage responsibility. Instead, the primary borrower would need to refinance or apply for a mortgage switch to remove a guarantor or a co-signer from the existing documents. This means the original applicant must qualify for a mortgage on their own before considering removing a guarantor or a co-signer.
Making the Right Decision
Co-signers and guarantors can offer borrowers a much-needed boost in their application. However, knowing which one will benefit your application the most can be a challenge. Careful consideration regarding your immediate financial situation and speaking to a trusted mortgage professional can help you make the right decision.
Factors to Consider When Choosing Between a Guarantor and Co-signer
When choosing between a guarantor and a co-signer, take the time to reflect on your finances. Getting a guarantor may suffice if your mortgage application is sufficient but could use a boost. On the other hand, if you can’t prove a reliable source of income, even if you can make all the monthly payments, you may need to add a co-signer instead.
Getting Professional Advice
Shopping for your dream home and applying for a mortgage go hand-in-hand. Sometimes, a mortgage pre-approval can let you know whether a guarantor or a co-signer will be needed on your final application. If you aren’t sure of the next steps or even how to get started, we are here to help. We’ll walk you through the application process and discuss the pros and cons of a mortgage guarantor vs. a co-signer. To get started, contact us today.
