Of Prime Interest: Co-signing on the dotted line
What it means to be a guarantor or co-sign on a mortgage is to either help to secure the financing to purchase or refinance a home.
People often use the terms guarantor and co-signer interchangeably, however, each has very different responsibilities and rights.
To begin with, a guarantor or co-signer will be required if the applicant is not able to obtain a mortgage approval independently.
That is usually due to poor credit, an 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 known that individual 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 which involves a credit check and disclosing all assets and liabilities as well as employment information.
They’re also required to sign all of the mortgage documents and can expect to remain on title until such time as the applicant qualifies for the mortgage on the own.
The co-signer is truly 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 he promises to carry the entire debt should the homeowner default.
During the application process, a guarantor will undergo a credit check and must disclose assets, liabilities and income.
It is a huge responsibility as the guarantor has fewer rights than a co-signer.
Their obligation is the same as a co-signer, however, a guarantor doesn’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 cannot 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, co-signers or guarantors need to evaluate the commitment they’re willing to make for a default mortgage deal will reflect badly on their credit ratings.