To better understand the differences, we should first understand how a Guarantor and Co-signer are the same. A guarantor and co-signer are both used to help obtain mortgage financing on a property – whether it is a purchase or a mortgage refinance. This is required when the primary applicant(s) fall short on credit or income qualifications required for the mortgage they’re applying for. A guarantor or co-signer brings additional strength and security to the application in the form of strong credit or additional income. In other words, they are personally backing the loan.
But they both sound the same. What’s the difference and how do I determine which to use?
The major difference is ownership risk!
Mortgage Guarantor: Added to the loan (mortgage), but NOT to the title (ownership) of the home. This means they are equally liable for ensuring mortgage payments are made (and on time), but do NOT assume any legal ownership of the home.
Mortgage Co-signer: Added to the loan (mortgage), AND to the title (ownership) of the home. This means they are equally liable for ensuring mortgage payments are made (and on time), AND they assume part ownership in the home (as little as 1%). Since they are assuming part ownership, they are therefore assuming more risk!
Who can be a Guarantor or Co-signer?
Banks are particular about who you choose to add to your application. While a Guarantor can be an immediate family member, relative, or close friend, banks prefer that a co-signer is a spouse or immediate family member.
Are credit scores impacted for Guarantors and Co-signers?
With some banks, it’s almost a guarantee that the mortgage loan will report to the credit bureau whether you are a guarantor OR co-signer. With others, this isn’t the case. However, in both scenarios, credit can be affected in the event of mortgage default.
Liability for Guarantors and Co-signers:
In the event of mortgage default, guarantors are likely to become liable for payments when the bank exhausts all other options in first trying to retrieve payments from the primary applicant.
With Co-signers however, they are equally liable for missed mortgage payments and credit will likely be impacted immediately.
Does a Guarantor or Co-signer need to reside in the home?
Although a Guarantor or Co-signer typically resides in the home, this does not have to be true for these options to be successful. In many cases, co-signers own and reside in their own home, with their own mortgage. Lender/Bank requirements will determine the suitability of the guarantor or co-signer chosen.
Can a Guarantor or Co-signer exit a mortgage agreement?
How can a guarantor or co-signer be removed from the mortgage at a later date?
If the primary applicants can now qualify for the mortgage loan on their own, the bank or lender can requalify them and remove the guarantor or co-signer from the mortgage. However, there’s more involved in removing a co-signer since they have assumed part ownership of the home. This is called a title refinance. For a title refinance, the guarantor or co-signer is removed from the mortgage just the same, but a real estate lawyer will need to remove the co-signer from the title and ownership documents. There are additional costs for this.
Noteworthy:
- When choosing a guarantor or co-signer to help approve your mortgage application, it’s important to understand and consider their credit score, income, financial stability, and other obligations they might have.
- Not all banks will allow a guarantor or co-signer – and this will be treated on a case-by-case basis with most banks depending on the overall application. This is why it’s so important to work with a Mortgage Broker who is knowledgeable in the lending criteria of many banks – not just one.
- A co-signer who already has an insured mortgage with CMHC might not be a suitable option if the primary applicant is also applying for an insured mortgage (aka. purchase with less than 20% down).
- Can you choose between a guarantor or co-signer? If both options qualify under your mortgage request, then yes. Most often, your overall application will determine which is possible, and which is not. Though not in 100% of cases, a co-signer is often required when income is being used to qualify the mortgage rather than just credit.
Are you ready to discuss further? We have a lot of banking options for you, and enough knowledge of each bank’s criteria to guide you down the right path. Call us today at (905) 455-5005.