Lenders may require a guarantor or co-signer for a mortgage in situations where the potential borrower has questionable income, self-employment, poor credit or insufficient employment history.
A co-signer or guarantor provides the lender with additional security should the borrower have difficulty making the mortgage payments.
Although the terms co-signer and guarantor are often interchangeable, there is a difference in the meaning and rights and responsibilities between the two.
Co-signers are typically required by the lender when there is poor credit or insufficient income to support a mortgage application.
As co-signers are partners in the mortgage application they are actually a co-owner of the property and will be registered on title.
Co-signers are equally accountable for any mortgage payments even if they are not expected to be the ones making the mortgage payments.
Lenders will require co-signers to submit their income verification documents and credit reports in the same manner the primary applicant does.
Co-signers can be on the mortgage for years or can be removed when the borrower is able to qualify on their own. Keep in mind that in most cases there will be legal fees incurred when there is a change on the title of the property.
A guarantor is still financially guaranteeing that they will make the mortgage payments if the borrower defaults on the payments but the most significant difference is that they are not on title and therefore do not have any claim to the property.
Lenders will require guarantors to undergo a screening process that includes weighing their credit score, income and net worth.
A guarantor is required to be stronger financially than a co-signer as they promise to carry the entire debt should the homeowner default.
If the borrower defaults on his payments to a point where they cannot meet their obligations, the home will be sold and the guarantor will be responsible for the missed payments and any losses associated with the sale.