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Guarantor mortgages are home loans backed by a third party who agrees to make payments on the mortgage if the original borrower goes into default. This financial arrangement allows borrowers with poor credit or limited credit to access home loans, but it carries significant risks for the party acting as a guarantor. It is important to be aware that guarantors and cosigners occupy different legal roles, as a cosigner is actually a coowner, sharing not just responsibility for the loan, but also equity; when a couple cosigns a home loan, for example, they own equal shares.
The most common format for guarantor mortgages is a parent providing assistance to children buying their first home. Family members are often a good choice for this arrangement because they are close to the borrower, and they can keep an eye on the borrower's activities, hopefully stepping in before the loan goes into default. If the borrower does stop making payments, the guarantor must take responsibility, or the bank will put the home into foreclosure, which will make a bad mark on the borrower's credit as well as the guarantor's.
Banks can extend various amounts of money on a home loan, usually based on the income of the primary borrower. With guarantor mortgages, the bank also looks at the guarantor's income to make sure that person will be able to make the payments, and may consider issues like available assets as well. These can be sold or converted in a default to cover the loan and get it back into good standing. A guarantor with poor credit, bad income, or limited assets is not a good candidate, from the point of view of the bank.
Parties approached to sponsor guarantor mortgages should consider the situation with care. It is advisable to talk to the borrowers about their plans for the loan and to request proof of income and savings. If it looks like the borrower would have trouble paying for the loan, the guarantor may want to decline, or to ask the borrower to implement a specific plan for managing payments in the event of job loss or other events. Once guarantors sign the paperwork, they are legally responsible for the loan, and their credit can experience a negative impact if the borrower does not perform.
Many banks offer guarantor mortgages along with a variety of other loan products. Buyers who suspect they will need assistance can talk to real estate agents and mortgage brokers about their options. It can be a good idea to prepare a package of information to use when approaching a prospective guarantor.