Being a Guarantor or Co-signer on a mortgage is a commendable act in helping a family member getting started in home ownership. There is a difference between the two.
A Guarantor is named on the mortgage but not on title. He/she guarantees the mortgage repayment in the event that the main borrower(s) cannot pay. Yet a guarantor has no claim on the property.
A Co-signer, on the other hand, is registered on title; so he or she is actually a co-owner, is also added to the mortgage application, and just as accountable for payments as the primary owner(s).
Being on Title is Mostly Required
Today, in approving a borrower needing a guarantor/co-signer, lenders want the helper in the Offer, on the mortgage and registered on title. They’re not satisfied with the person being on the mortgage only.
There are, however, some risks. Here are 6:
- Any mortgage you co-sign or guarantee becomes part of your personal debt and can, therefore, affect your credit report.
- It can restrict you from qualifying for any additional financing, and this can put your own needs for borrowing at risk.
Recently, a fairly sophisticated investor could not qualify for a mortgage for her own purchase because her credit report indicated that she was a co-signer for her son’s mortgage.
- It’s difficult to be taken off of the mortgage as a guarantor or co-signer. According to Betty Talbot, mortgage agent for Centum Omni Mortgage Corp., she knows of only a couple of lenders who will allow a borrower to reapply after 12 months of satisfactory repayments to have the guarantor removed from title and the mortgage.
- Even on renewal of a mortgage term, it’s difficult to have guarantor removed. The lender will want a whole new mortgage and the remaining mortgage holders will have to qualify on their own. Alternatively the primary owners can pay out the mortgage by obtaining a mortgage through another lender, again on the basis that they qualify on their own. Either alternative will entail legal fees.
- On sale of the property, the co-signers and co-owner might be subject to capital gain on their share of the property.
- As a title holder, if a co-signer passes away, his/her percentage share will become an asset of the estate. Without designating a percentage share of ownership, the asset will be divided equally among the owners.
So let’s say three people are registered on title: a son, his wife and father. If the father passes away, then one-third of the property becomes an asset of the father’s estate. In a recent case the son and wife had to purchase back the father’s third from the estate. Yet the father never had to contribute to the mortgage payment and was only on title to help with the mortgage being approved.
So co-signing has it altruistic benefits yet also its consequences.