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Being a mortgage guarantor

As Bill Withers wrote, and countless crooners have since sung: "We all need somebody to lean on." For many mortgage applicants, that somebody is a guarantor who helps secure the financing to purchase a house.

If an applicant isn't able to obtain a mortgage independently -- usually due to poor credit, insufficient employment history, inadequate down payment or questionable income -- most lenders will make a deal if there is someone who will back the borrower should he have trouble making payments.

Co-signer versus guarantor
People often use the terms guarantor and co-signer interchangeably, but they have very different responsibilities and rights. A co-signer is basically a co-owner -- he is registered on the title and is equally accountable for payments (although it's often a given that he will not make the payments).

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A guarantor, on the other hand, personally guarantees payments will be made if the original applicant defaults, but he has no claim to the property because he is not on title.

Lenders require co-signers and guarantors for different reasons, explains Helen Hancey, a mortgage specialist with The Mortgage Centre in Orangeville, Ont. "A co-signer is used when you need to support income," she says. If the original applicant's qualifying ratio doesn't meet the lender's standards, a co-signer is required to bridge the income gap.

A co-signer, because her name is also on the title, must sign all of the mortgage documents and can expect to remain on title until the applicant qualifies for the mortgage on his own. Or, in the case of two spouses, the co-signer might remain on title indefinitely. Keep in mind that removing someone from the title involves legal fees.

A guarantor is usually called upon if the applicant qualifies incomewise, but has a slight credit blemish or has yet to establish credit. "In a lot of cases, you seek a guarantor for younger individuals," says Maria Racanelli, vice-president, personal banking, BMO Bank of Montreal.

It's also an option for couples where one spouse is an entrepreneur and don't want to risk losing the house should the business go bankrupt -- they simply keep her name off the mortgage.

Guidance for guarantors
A guarantor has to be stronger financially than a co-signer, says Hancey, because he promises to carry the entire debt should the homeowner default. As a result, guarantors are carefully scrutinized and undergo a credit check and must also disclose assets, liabilities and income.

It's a huge responsibility. "(Guarantors) have less control and fewer rights than a co-signer," says Hancey. "Their obligation is the same as the applicant, but they don't have the luxury of being on the title, so they don't have any claim to the property."

As a result, it's important for guarantors to know all of the circumstances of the person they're acting for and be confident the applicant will make the payments. Before signing, all guarantors should seek advice from a lawyer who is independent of the real estate transaction.

It's also smart to secure creditor insurance in case things go awry. Racanelli advises that the applicant and guarantor discuss collateral or come up with a repayment plan, should the guarantor be called on to cover the debt, from the outset.

When a guarantor wants out
Some lenders offer early release policies that free the guarantor from obligation (usually after 12 months) if the borrower is up-to-date with payments and has established good credit. Sometimes a guarantor can remain under obligation for several years.

Before agreeing to act on behalf of an applicant, guarantors need to evaluate the time commitment they're willing to make. If, for example, they want to buy their own home in a few years or take on any major debt, such as a car or boat, they may not qualify because of their guarantor status.

"People usually don't think that far in advance," says Nick Kyprianou, senior vice-president with Home Trust Company, in Toronto, adding that there are options should a guarantor want out early. One such option is for the homeowner to refinance -- usually at a slightly higher rate -- with a second-tier mortgage lender that is more flexible when it comes to debt-to-income ratios or credit transgressions.

"Banks are the big proponents of guarantors," says Kyprianou. "We're more inclined to give (applicants) a chance without the guarantor if we're happy with the real estate."

Building a strong support system
Racanelli points out banks are also willing to work with applicants to devise mortgage strategies that meet their needs. For example, in the case of the entrepreneur, if the bank knows the couple and their history, they may not be asked for a guarantor because the bank has confidence in the couple's payment ability. "It's important to have a really solid relationship with your bank," she says.

It's also important to have a strong relationship between applicant and guarantor. Most lenders prefer a family member, not simply a friend, because they usually have a more deeply vested interest in the applicant. "There's got to be a lot of trust there," says Racanelli.

It's often thought that if the homeowner defaults on even one payment, the guarantor will be called upon to make good on the debt. But according to Racanelli, that isn't the case. "It would really be a last recourse," she says. "Banks will do everything to avoid going to the guarantor."

Namely, they'll work with the homeowner to come up with a plan to help them hold on to her home. Should a situation deteriorate to the point that the homeowner cannot meet her obligations, the house will usually be sold and the guarantor will be responsible for the missed payments, as well as any loss associated with the sale.

However, it rarely comes to this. Many people with income or credit issues are ready for the responsibility of a mortgage; they just need somebody to lean on -- be it a guarantor, co-signer or understanding lender.

Michelle Warren is a freelance writer in Toronto.

-- Posted: June 8, 2005
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