What’s the Difference Between Co-Signer vs. Guarantor on a Mortgage? 

If you’re a first-time homebuyer who needs help securing your first mortgage, you might come across terms like ‘co-signer’ and ‘guarantor.’

While both options can help you secure a loan when you may not qualify by yourself, it's crucial to understand the differences between having a co-signer vs. guarantor.

What is a Co-Signer?

A co-signer agrees to take joint responsibility for repaying a loan with the primary borrower – they are placed on both the mortgage and the property title.

Co-signers help secure the mortgage by pledging their credit and income alongside the applicant. Typically, a co-signer is a close family member or friend with a strong credit history and stable income.

How much of the property will they own? This is open to discussion but can be as little as 1%.

Pros of a Co-Signer:

1. Increased chances of approval: A co-signer with a strong credit history and income can help boost the primary borrower's chances of obtaining a mortgage when their credit may fall short. Typically, a co-signer is universally accepted by lenders, which is a big plus.

2. Better mortgage terms: Co-signing a loan can help the primary borrower secure better terms, such as lower interest rates or a larger loan amount.

Cons of a Co-Signor:

1. Shared liability: The co-signer is equally responsible for the mortgage payments. If the primary borrower fails to make payments, the co-signer becomes responsible for the outstanding amount, which can hurt their credit score.

2. Limited borrowing capacity: Being a co-signer can impact your ability to obtain additional loans or credit, as they are considered financially responsible for the mortgage.

3. Tax implications: Because the co-signer is also co-owning the property, they are responsible for paying taxes. If you sell the property, this person may have to pay capital gains tax.

4. Credit implications: If you miss a payment on your mortgage, the co-signer’s credit could be negatively affected since they also own the property

What is a Guarantor?

A guarantor agrees to be responsible for the mortgage if the primary borrower defaults on the loan. Guarantors typically have a strong credit history, stable income, and often own property. They don't have joint ownership or responsibility for making monthly payments but are used as a safety net for the lender.

Pros of a Guarantor:

1. Increased chances of approval: Having a guarantor can help the primary borrower obtain a mortgage when their creditworthiness may not be sufficient for approval.

2. Reduced financial burden: The primary borrower remains solely responsible for the mortgage payments, allowing the guarantor to maintain their borrowing capacity for future loans or credit. Because of this, being a guarantor is generally more desirable for parents than co-signing.

3. No tax implications: The guarantor does not have to pay capital gains tax because they do not own the property.

Cons of a Guarantor:

1. Risk of default: The guarantor is responsible for the mortgage if the primary borrower defaults on the loan. This responsibility can impact the guarantor's financial future, credit score, and relationship with the primary borrower.

2. Limited control: As a guarantor, the individual does not have joint ownership or control over the property, despite being liable for the mortgage in case of default.

3. Not universally accepted: Many lenders do not accept guarantors – it’s often done on a case-by-case basis.

Can You Have Both a Co-Signer and Guarantor on a Mortgage?

It is possible to have both a co-signer and a guarantor on a mortgage, but it's not a common scenario. In most cases, having one or the other is sufficient for securing a mortgage.

A lender may require both in specific situations, such as when the primary borrower and co-signer have bad credit scores or income. However, this arrangement may limit the borrowing capabilities of all parties involved and increase the risk for the guarantor.

Choosing between a co-signer and a guarantor largely depends on your financial circumstances and the level of involvement you'd want from the third party.

A co-signer takes on joint responsibility for the mortgage, helping secure better terms but sharing liability for the loan. Meanwhile, a guarantor solely guarantees to pay the mortgage if the primary borrower defaults, avoiding direct responsibility for monthly payments while still taking on the risk.

Before deciding on either option, it's essential to have open and honest conversations with potential co-signers or guarantors about the responsibilities and risks involve.

Reach out if you need help figuring out the best course of action for your unique circumstance.