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Edmonton Mortgages – Co-signer vs. Guarantor

With the cost of homes increasing in certain markets and the stress test in place, it’s becoming more and more common for the average individual to struggle when it comes to qualifying for a mortgage. Unable to obtain financing on their own, they often look to family members to step in and provide financial support. One way family members can help is by becoming a co-signer or guarantor.

Though they are often used interchangeably, there
are very distinct differences between a co-signer and a guarantor in terms of
rights and responsibilities; one should not be confused with the other.

The co-signer

A co-signer is typically brought in to aid an
individual who has a low or inconsistent income stream or credit issues, and
thus, is unable to qualify for a mortgage on their own. As a co-signer, their
name appears on the title to the property; they co-own the home with the person
living in it and making the mortgage payments.

Because the co-signor legally owns the property,
he or she is required to sign all of the mortgage documents and is liable for
all mortgage payments. Though the co-signer is not likely the one that will be
making regular payments, they will be held accountable to this duty should the
primary applicant fail to do so. The co-signors assets can also be at risk
should payments cease and the mortgage goes into default. If the co-signor
dies, his or her estate assumes liability for the mortgage payments.

The guarantor

A guarantor can also help a primary borrower
obtain a mortgage. In this case, the primary borrower usually has a weak credit
score rather than an unverified or unreliable income stream. The credit score
may be preventing them from securing a mortgage on their own, which is where
the guarantor (who generally needs to be in better financial standing than a
co-signor) can step in and satisfy the lender’s criteria for approval.

Unlike a co-signor, the guarantor’s name does not
appear on the title of the property, only the mortgage. They are not legally
entitled to any ownership of the property. The job of the guarantor is to
guarantee that the mortgage payments will be made if the primary borrower gets
approved.

Because the guarantor does not legally own a
portion of the property, they typically only become liable for the mortgage
once the lender has failed to enforce collection payments from the primary
borrower. Because of this risk, certain lenders disallow guarantors unless they
are the primary borrower’s spouse.

Risks and exit plans

Both co-signors and guarantors assume some level
of risk that can leave them on the hook for the mortgage.

Co-signers are legal owners of the property and
are liable for 100% of the mortgage, though they retain the advantage of
potential property appreciation and may be entitled to a portion of the
proceeds of the sale of the property. Guarantors only become liable for the
mortgage once the lender has exhausted all options to collect payment from the
primary borrower, but they won’t partake in any gains from the sale of the
property as they have no ownership rights.

Once
the primary borrower’s financial situation has improved, both parties can agree
to have the co-signor or guarantor removed from the mortgage. It’s critical for
each party to consider their personal needs when thinking about going on
another person’s mortgage. This could affect credit and finances in the future
and it is important to understand all details before signing on the dotted
line.