How to Get a Guarantor Mortgage

What Is a Guarantor Mortgage?

A guarantor mortgage is a type of mortgage where the buyer's parent or another close family member agrees to financially guarantee the new mortgage. As such, this mortgage guarantor typically must put up cash or their own home as security on the new home loan.

In this arrangement, the guarantor takes on considerable risk and bears responsibility for the monthly mortgage repayments if the homeowner fails to make them for any reason. At the same time, the guarantor is not usually named on the house deeds. Despite the risks, many parents and grandparents are willing to act as a guarantor on a mortgage loan to help a loved one purchase a home.

Guarantor loans might make sense if you need to borrow more money than you could if you applied for a loan on your own. Additionally, guarantor loans are a good option if you have a poor credit history or no credit score or are unable to pay the minimum down payment. If you don't have the credit score you need to buy a house, a guarantor loan can provide extra security for lenders who may otherwise view you as too risky.

Who Can Be a Guarantor?

Guarantor requirements vary by lender, but many lenders often want your guarantor to be a parent, grandparent or close family member. Your lender will review your guarantor's assets, income and credit history to ensure they can cover the monthly mortgage payments if you cannot.

Lenders often require the guarantors to be homeowners with their mortgage completely paid off, or close to it. If the guarantor is still paying off their mortgage, they must demonstrate they have sufficient income to make payments on your loan and their loan if necessary.

Pros and Cons of Guarantor Mortgages

It's wise to weigh the benefits and the downsides of guarantor loans before deciding whether to go forward with one.

Pros

• It may be easier to qualify for a loan. If you can't qualify for a home loan large enough to purchase a home, a guarantor loan may be able to push you over the hump.
• You may qualify for a higher loan amount. Your lender may be more likely to approve a larger loan, even with a low down payment. Some guarantor mortgages provide financing up to 100% of the property value since the loan comes with the extra home or savings security provided by the guarantor.
• You may qualify even with a negative credit history. The guarantor's pledge to secure the loan and make monthly mortgage payments may increase your approval odds by minimizing the lender's risk.

Cons

• Few lenders offer guarantor mortgages. The number of financial institutions offering guarantor mortgages is dwindling, so you may find it challenging to find a lender.
• The guarantor carries considerable risk. The guarantor must cover the monthly mortgage repayments if the home buyer fails to do so. And if the guarantor uses their own home as security on the mortgage, they could potentially lose their home if the home buyer defaults on the mortgage.
• Your loan could end up upside-down. If you finance 100% of the property's value, it's easier to end up underwater if home prices fall. Being underwater means your home loan is higher than the value of your home.
• You could pay a higher interest rate. Guarantor mortgages usually come with higher interest rates than traditional mortgage loans as lenders consider them to be riskier investments.

Alternatives to Guarantor Mortgages

Guarantor mortgages can help you qualify for a mortgage if you have bad credit or limited savings for a down payment. Still, they're not your only option. Consider the following options to help you narrow down your best choice for home financing:

• Conventional mortgage: You may be eligible for a conventional mortgage with a credit score as low as 620 and a down payment as low as 3%. Remember, however, your lender will likely require you to pay private mortgage insurance if you don't put down at least 20%.
• FHA mortgage: FHA loans are a good option if you have a limited credit history, as they require a minimum 500 credit score with 10% down, or a 580 credit score with a 3.5% down payment.
• Joint mortgage: Getting a co-borrower can help you qualify for a home loan with a thin credit profile. The difference between a mortgage co-borrower versus a guarantor is that the co-borrower is typically listed on both the mortgage loan and the property title.
• Cash gift: Perhaps the most straightforward way to help a child purchase a home is to gift them money to use as a down payment. Ideally, the child has a stable and sufficient income to cover the loan's monthly payments and other financial responsibilities.

Discover Where Your Credit Stands Before Applying for a Guarantor Mortgage

While you can get a guarantor mortgage with little or no credit history, bad credit can affect your chances of approval and the interest rate you receive. As such, you might consider taking the time to improve your credit score before applying for a mortgage, especially since a loan rejection could negatively influence your credit score.

It's wise to see where your credit stands before applying for any mortgage. Check your credit report and credit score for free with Experian. Carefully review your report for inaccuracies or suspicious items and dispute these errors with the credit bureaus. With an improved credit score, you may be eligible for better mortgage options and more favorable terms to save money over time.