In today’s housing market, some parents and other relatives are asked to act as a guarantor or co-signer on a mortgage for young buyers who may not have the employment history or credit scores to qualify for a mortgage.
A co-signer is basically a co-owner, i.e., registered on the title and equally accountable for payments (although it’s often a given that the co-signer will not make the payments).
A guarantor, on the other hand, personally guarantees payments will be made if the original applicant defaults, but is not on title and therefor has no claim to the property.
Lenders require co-signers and guarantors for different reasons, explains Helen Hancey, a mortgage specialist with The Mortgage Centre.
“A co-signer is used when you need to support income,” she says. If the original applicant’s qualifying ratio doesn’t meet the lender’s standards, a co-signer is required to bridge the income gap.
A co-signer must sign all of the mortgage documents and can expect to remain on title until the applicant qualifies for the mortgage on his own. Or, in the case of two spouses, the co-signer might remain on title indefinitely. Keep in mind that removing someone from the title involves legal fees.
One exit option for a guarantor is for the homeowner to refinance — usually at a slightly higher rate — with a second-tier mortgage lender that is more flexible when it comes to debt-to-income ratios or credit transgressions.
Talk to your lender and lawyer before becoming a guarantor or a co-signer on a mortgage.