A “guarantor” is a valuable resource for those who may have a poor credit history or lack sufficient income to qualify for a loan.
Essentially, a guarantor acts as a safety net for the mortgage holder, promising to pay back if the owner of the mortgage is incapable. It might be a fantastic way to get a mortgage application approved, as it reassures the lender that they will not be left in the lurch if the mortgage holder defaults.
Who is a guarantor: A mortgage guarantor is an individual that guarantees the repayment of a mortgage loan in case the borrower defaults on their payments. A guarantor is often an applicant’s family member or friend with a solid credit history who is prepared to bear responsibility for the loan. In some cases, a Canadian mortgage guarantor can also be a financial institution, such as a bank or credit union, that offers a mortgage insurance product to protect the lender in case of default.
It's important to remember that lenders have strict guidelines for who can and cannot be a guarantor on a mortgage.
When choosing a guarantor, it’s crucial to select someone who is financially stable and trustworthy. However, not just anyone can be a guarantor, as lenders have specific eligibility requirements that must be met. While family members, close friends, or partners are often chosen as guarantors, they must still meet these requirements. In some cases, lenders may require a guarantor if the standard criteria for a mortgage loan cannot be met. Having a guarantor can be a valuable asset in securing a mortgage loan. Therefore, it’s crucial to recognize the part they perform in the entire process. Here are some key points regarding who can act as a Canadian mortgage guarantor:
- A guarantor must be of legal age, which is above 18 years. And because of the increased probability of dying from natural causes, lenders do not allow anyone over the age of 75 to act as guarantors.
- The person who guarantees your loan must possess a good credit score and a sound financial history, and they must have known you for at least two years.
- Typically, the role of a guarantor is taken on by a parent, grandparent, or an extremely close and trustworthy person with good-standing credit.
- Companies can also act as guarantors for commercial mortgages.
A guarantor and a co-signer are two distinct roles that can be used to help someone qualify for a mortgage.
The distinction amongst the two lies in the extent of liability they bear if the primary borrower fails to make payments.
|
Guarantor |
| The mortgage loan guarantor is an individual who pledges to pay the mortgage installments if the principal borrower is unable to do so. Essentially, the guarantor is backing the loan and promising to make payments if the borrower cannot. However, the guarantor is not a co-owner of the property and does not have any rights to it. They are simply providing financial support to help the borrower qualify for the mortgage. |
|
Co-signer |
| A co-signer is an individual who shares responsibility for mortgage payments with the principal borrower. Unlike a guarantor, a co-signer is a co-owner of the property and has rights to it. This implies that a co-signer is equally responsible for the mortgage payments, and if the primary borrower defaults, the lender can go after the co-signer for payment. |
It’s important to note that being a mortgage guarantor is a serious financial commitment. You should carefully consider the risks and obligations involved before opting for one.
What does the process of getting a guarantor on-board look like:
- Look for potential guarantors: The person providing the guarantee must be a Canadian citizen or permanent resident with strong credit and financial stability. And should be prepared for taking the responsibility of guaranteeing your financial obligations. Potential guarantors could be family members, friends, or colleagues.
- Discuss with potential guarantors: Talk to potential guarantors about the obligations and responsibilities involved in being a guarantor. Ensure that they are aware of the agreement’s terms and conditions and that they are willing to take on the responsibility.
- Provide necessary documentation: The guarantor will need to provide documentation proving their identity, citizenship or permanent residency status, and financial stability. This could involve a valid passport, driving license, or any government-issued identification, as well as proof of income, employment, or assets.
- Sign the agreement: Once the guarantor is approved and all necessary documentation is provided, both parties will need to sign a legal agreement outlining the terms and conditions of the guarantee. This agreement will be binding and enforceable in court in case of default.
What is required of a guarantor:
- Filling out and signing a guarantor declaration form. (Indigenous Services Canada)
- Signing and dating each copy of the front and back of a valid identification.
- Additionally, the guarantor must sign, date, and write their name or the name of the dependent adult on the back of a photo or, if using the SCIS Photo App, on the digital photo.
To be available, as well as capable of answering basic questions regarding the applicant, like physical description, approximate age, place of birth, and your residential address if Indigenous Services Canada gets in touch with you.
| Advantages of using a guarantor |
| Helps to improve the approval chances of your mortgage application because of the added security. |
| By using a guarantor, you can be funded even with a poor credit score. |
| If your income is too low while qualifying for a loan, then a guarantor can aid you in attaining one. |
| Helps in attaining higher loan amounts. |
| Disadvantages of using a guarantor |
| Risk of damaging relationship with the guarantor. |
| Limited options for guarantors, such as the inability to obtain their own loan. |
| Responsibility for missed payments or default falls on the guarantor. |
| It’s a time-consuming process to find and secure a guarantor. |
The Bottom Line
Having a guarantor can be a helpful option for those struggling to secure a loan via general means. But it’s important to properly weigh all of the relevant factors before deciding on what to do. Make sure you fully understand the responsibilities and potential risks for both yourself and your guarantor. With proper communication and understanding, a guarantor agreement can be a beneficial solution for all parties involved.
