When someone needs help securing a mortgage to buy their first home or if a couple wants to combine resources to strengthen their mortgage application, a guarantor or co-signer can help.
But what is the difference and what are the risks?
A guarantor is added to the mortgage but is not on the title and does not have any ownership of the home. A co-signer is added to both the mortgage and the title of the home.
Let’s look into the difference between a guarantor vs. a co-signer in more detail:
Guarantor
- A guarantor is added to the mortgage but is not included on the title.
- Liable for mortgage payments being paid on time, a guarantor does not have any ownership of the home.
- A guarantor can increase the likelihood of mortgage approval in the case of a borrower’s financial instability.
- Not every lender will accept guarantors as another signer.
Co-Signer
- A co-signer is added to both the mortgage and the title.
- Because a co-signer is 100% liable for payments and part-ownership of the home, they take on more risk.
- A co-signer can also increase likelihood of a mortgage approval, particularly for first-time home buyers with limited credit history.
- When you are a co-signer and are listed on title, there could be tax implication when the property is sold if it isn’t considered your personal residence.
Guarantor vs. Cosigner: Which is Riskier?
Because a co-signer is on the title, even if they don’t contribute to the monthly payments (say in the case of a spouse, for example), their assets can be at risk if the other signer and primary borrower defaults on their loan.
Guarantor vs Co-Signer Application: Good to know
If you’re finding it tough to meet the mortgage stress test, having a guarantor or a co-signer can be the financial backup you need.
Both guarantor and co-signor can be a family, or a friend and in some circumstances, it can be an entity.
Think of the guarantor as the safety net in case the original borrower doesn’t make the mortgage payment. As long as the original mortgage holder doesn’t miss payment the guarantor will not have to be involved. A co-signor is legally responsible to cover a missed payment should the primary borrower falls behind.
In both cases, it increased the chances of the primary borrower to be approved if he has a bad credit history or can’t respect the debt ratios on his own.
One aspect which is often overlooked when homebuyers are considering asking someone from their entourage to become a guarantor or a co-signor is that income assets and liabilities will all be considered. This means if the person you plan on adding as a guarantor or co-signor has good income but also has a mortgage, car payment and other financial obligations (spouse or child support payment), it may not have the positive effect that you were hoping for.
Each lender can have different rules and requirements surrounding the use of a guarantor vs. co-signer to secure a mortgage approval. And not all lenders will allow guarantors. Others will look at applications on a case-by-case basis.
When to Use Cosigner vs. Guarantor
Choose a co-signer when you need to strengthen your application with someone else’s income or credit: they’ll share legal ownership of the property and be equally responsible for the mortgage from day one.
Pro tip: Co-signers don’t always intend to be part-owner. In many cases it’s a requirement they may not fully anticipate, so it’s worth flagging this clearly for anyone who is co-signing.
Choose a guarantor when you qualify for the mortgage but need a financial backstop: they won’t appear on title or share ownership but they agree to cover payments if you default.
Is it a forever-commitment?
Need to exit, and the primary borrower’s financial stability or credit standing has improved?
Becoming a guarantor or a co-signer for a mortgage loan is a legal financial commitment and isn’t something to jump into lightly in the Toronto Housing Market. But that doesn’t mean you have signed your life away.
Both the primary borrower(s) and the signing parties can ask the lender to consider removing the co-signer/guarantor from the loan (fees may apply). The lender would consider releasing the guarantor or co-signor if theborrower can qualify and respect its lending guidelines as well as the debt- ratios on his own.
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