Rising interest rates, inflated home prices, and high stress test requirements have made mortgage qualification harder than ever. Under the current Canadian market conditions, many aspiring homebuyers find themselves needing an extra push to help them qualify.
If you are currently in the process of applying for a mortgage, you may have considered asking your friends or family to support your mortgage application as a co-signer or guarantor. While these two terms are sometimes used interchangeably, it is crucial to not get them confused. In this guide, we will explore the implications of supporting a mortgage application as a third party and discuss the distinct differences between co-signers and guarantors in terms of rights and responsibilities.
Both co-signers and guarantors can help qualify otherwise ineligible individuals for a mortgage, but their roles, rights, and responsibilities can vary greatly.
A co-signer is essentially a co-owner of the home. They must sign all mortgage documents and their name will always appear on the title of the property. From a legal standpoint, co-signers have just as much ownership of the property as the person they are signing for. As such, they are to be held accountable for the monthly mortgage payments getting made.
The co-signer is technically may or may not be signing up to make the monthly mortgage payments. In some cases, the co-signer will not be living on the property at all. However, it is important to understand that in the event that the borrower is unable to make their payments, the co-signer will be required to step in and make them on their behalf.
If the primary applicant defaults on their mortgage, the co-signer will assume full responsibility of the loan. This responsibility, if not paid off, can even be passed down to the co-signer’s estate if they were to pass away before fully repaying the loan.
This is why the full liability and monthly mortgage payment will be reflected in the co-signer’s credit bureau and might affect them when they try to apply for their own mortgage in the future, or other credit products.
A guarantor has very similar responsibilities to a co-signer, but they do not have legal claim to the property. Unlike a co-signer, a guarantor will not be included in the title of the home. As such, guarantors generally need to have better credit than co-signers in order to qualify, and not every situation or lender will allow for a guarantor and might instead insist on a co-signer. The primary role of a guarantor is to guarantee that monthly mortgage payments get made.
While the guarantor is responsible for ensuring the payment of monthly mortgage dues, they will not own the home in any way, even if the primary applicant defaults on their mortgage. Unlike a co-signer, a guarantor will not have the mortgage loan appear on their credit history because their name is not on the deed.
Both co-signers and guarantors can provide your application with a number of benefits. In addition to helping you qualify for a mortgage in the first place, having a guarantor or co-signer may help you qualify for better mortgage terms or rates, or higher mortgage amounts— especially if you are a first-time homebuyer.
While both co-signers and guarantors can boost your application, based on your current financial situation, one type of application support may be more applicable to you than the other.
A co-signer is most commonly used for applicants with major gaps in their mortgage application. If you have a poor credit history or difficulty in proving your income, a co-signer might be the best and only way to get approved within the year.
Many applicants are fully capable of making their monthly mortgage payments but may be self-employed or have no pre-existing credit history— resulting in an unfair assessment of their mortgage application. Applicants in the service industry may also need co-signers if their lender refuses to consider tips as income, leading to a discrepancy between what they can afford and what they can qualify for.
On the other hand, a mortgage guarantor is often used by applicants who qualify for their desired mortgage, in terms of income, but may need an extra push to mitigate credit-related problems on their record. Young, first-time applicants may find themselves in need of a guarantor if they do not yet have any credit history on their record. For more information on navigating this unique situation, check out our guide on buying a home without a credit score. Again, it is important to note, that whether a lender allows a guarantor instead of a co-signer is at their disclosure.
Unlike co-signers, guarantors need to be in almost perfect financial standing. After all, they are essentially taking the primary applicant’s place and satisfying the lender’s requirements with their own credit score and debt history. Despite this, guarantors have no ownership of the property and can only be held liable for the loan if multiple attempts to collect from the primary applicant have already failed.
While having a co-signer or guarantor may be very advantageous to your mortgage approval process, it is important to remember that the individual supporting you is signing up for a significant commitment. The average term period for a mortgage is 5 years, not to be confused with the amortization period of a mortgage. You can likely only remove a co-signer or guarantor from your mortgage contract by refinancing or applying for a new mortgage altogether. Depending on the type of mortgage you get, you may not want to refinance prior to the term being finished. At this point, you will also need to qualify for your new mortgage without external assistance.
If you are currently looking to refinance your mortgage without a co-signer or guarantor, contact our Clover Mortgage team and we can discuss the different options available to you.
Co-signers and guarantors can be a great way to increase your odds of approval. However, there are other measures you can take if you do not want to go down that route. You can spend an extra year living at home or renting in a cheaper area while you save up a larger down payment, build up a stronger credit history, and improve your credit score. If you decide to start budgeting for a larger down payment, you might not need as large of a loan, unless the growth rate of property prices outpaces your savings abilities. You can furthermore take advantage of little-known tips and tricks to boost your income on your mortgage application.
Whatever the case may be, Clover Mortgage is here to help. Our expert team has experience working with a vast network of lenders, and we can help you find the best mortgage for you. Contact Clover mortgage today to book a free consultation.