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For many of us, saying “no” to someone who asks for a favor can be hard. Especially if it is to a favor that could change their life. One example of this is when someone asks you to be a Co-Signer or Guarantor. This is where you basically vouch for someone that they are good for a loan so that the bank or car dealership will approve their loan application.
It may sound innocent enough but believe me, it is potentially a disastrous situation.
For the purpose of this article we are strictly going to discuss being a Guarantor on a mortgage as it differs from other items such as cars, leases, etc.
So when might someone need a Guarantor on their mortgage? Usually only when the banks will not loan you money because one of the 3 major items on their check list cannot be satisfied. Credit, Down Payment and Income.
Down payment is down payment and a Guarantor wont effect this but if your income or credit is not that good than a Guarantor can strengthen your application so that it is approved and the applicant can buy their new home.
So what exactly are you saying to the lender as a Guarantor?
You are saying that although the applicants credit/income is not sufficient to approve the loan, I will place my good credit and assets on the line to strengthen their application to get it approved. In other words, if they don’t pay you back I will.
That’s right, YOU are on the line.
So let’s throw an example out there of how this situation would unfold if for some reason it went sideways.
You become a Guarantor for a friend of yours who can’t get approved on their loan on their own. You are NOT on title for this property; it is not your home. You are just on the mortgage agreement. For the most part, as long as the bills are getting paid on time by your friend you wont even notice that you have signed anything.
If your friend loses their job, misses a series of payments and can’t get caught up, get’s ill, or for some other reason is unable to make their payments, the mortgage will be in default and usually after about 3 months the home will be in foreclosure. If the banks sells the property and the funds cover the loan then you should be fine but if there is any shortfall in the funds, the banks will be able to come after you and your friend.
Here is where you need to be careful. You and your friend are technically 50/50 when it comes to liability on the loan but when you really think about it, if they needed a guarantor in the first place then that probably means that they have no assets or money which means 100% of any short fall winds up on your shoulders.
That is not a good situation for you.
Owning a home is a huge responsibility and often if income or credit is that much of an issue then depending on the situation, perhaps waiting until you are in a healthier situation is best. Owning a home or strata unit comes with a lot of additional costs and responsibilities that many new home owners are unaware of. (maintenance, yearly taxes, in strata units a $10k bill is not unusual for repairs, and so on)
There are really only a couple of times that in my opinion it is ok to Co Sign.
1. If it is your spouse and you are looking to save your first time home buyer status
2. If it is for your grown child who perhaps was a student and is not working but has no established credit history
If you have any questions about this or anything else concerning finance, please leave me comments below or give me a call. 604.313.9996
http://MortgagesInVancouver.com
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