If you’re applying for a private mortgage, it’s essential to understand the differences between a co-signer and a guarantor and which one is right for you. Both can boost your chances of mortgage approval, but other implications, such as property ownership, must be addressed.
Defining Co-Signers and Guarantors
Understanding the differences between a guarantor and a co-signer starts with clearly understanding each. A clear definition of both can provide a good overview and starting point for making the right decision.
Because their name appears on the loan application and property title, a co-signer is a co-owner of the home or property involved.
A Co-signer
A co-signer agrees to take on the responsibility of a loan alongside the person taking it out. They decide to repay the money if the primary applicant defaults. This is a legal agreement in which they take joint responsibility for the loan. A co-signer also agrees to cover any required payments if the primary borrower doesn’t meet them.
A co-signer is also responsible for any interest and penalties if there’s a default or a missed payment.
A Guarantor
These people also accept the responsibility of repaying a loan if the primary borrower defaults. However, a guarantor generally has no claim on whatever asset is being financed and or ownership rights.
These people are used to help applicants who have bad credit or non-traditional income get a mortgage loan.
Key Differences Between Co-Signers and Guarantors
There are several key differences between these two entities. While both supply additional security for lenders, there are some differences between a co-signer and a guarantor.
A guarantor becomes responsible for the outstanding mortgage balance only if the primary borrower defaults. On the other hand, a co-signer is obligated to cover any missing mortgage payments.
Why That Matters
The co-signer is responsible for missed payments on an ongoing and immediate basis. Thus, a co-signer can be accountable at any point during a loan term.
A guarantor is subject to less risky rules. They don’t have any say in how the loan is managed. Guarantors must also know they can be charged hidden costs, such as penalties and lateness if a borrower defaults.
Because the co-signer is a co-owner of the property, there are legal responsibilities that follow.
This relationship between the borrower and the co-signer can complicate things when the property gets sold. Because the co-signer has ownership rights, there needs to be a legal agreement that provides clear terms about sharing the proceeds from a sale.
What’s more, if a borrower misses payments, that can hurt the co-signer’s credit score.
A guarantor has a more straightforward relationship because they have no legal stake in the property.
Implications for Mortgage Approval
When people with bad credit can find a co-signer with a good credit score, their chances of getting approved for a traditional loan increase, however, there is a potential issue.
Getting involved can affect the co-signer’s financial standing and credit score. Their name and property title appear on the loan application. If the primary borrower doesn’t have enough, a co-signer might need to contribute to a down payment for a traditional loan.
It’s important to remember that a co-signer is listed on the property title. This is good news for potential borrowers with bad credit because a private lender may consider combined incomes.
Still, private lenders face more significant risk, so they charge higher interest rates. As of January 2025, many private lenders charge between 8% and 12%. There are a few other things to consider when making the right decision.
Choosing the Right Option for Your Situation
There are a few more things to consider when making a good choice.
- Some private lenders might favour a co-signer over a guarantor.
- Borrowers who don’t mind sharing the title to the property should consider a co-signer.
- A guarantor is better if you’re more independent-minded because you keep the finances separate.
Some private lenders also favour a co-signer because the co-signer is more attached to the loan and provides a better backup if the borrower has trouble making the payments.
Impact on Property Ownership
Other impacts on property ownership exist besides the ones listed for a borrower seeking a private mortgage with a co-signer or guarantor.
Through A Guarantor
The borrower’s use of a guarantor means they keep 100% ownership of the property because that person isn’t added to the title. This allows the borrower to control decisions like renting, refinancing, and/or selling the property. They also keep all the equity if the property increases in value.
The equity is usually defined as the current market value of a house or property, subtracting the balances on any mortgages or liens.
Legal action can follow if a borrower defaults on the guarantor because they must cover the payments.
Through a Co-Signer
On the other hand, there’s a shared ownership scenario with a co-signer. That means they must be involved in big decisions because they legally have ownership rights.
Removing a co-signer from a title can be a complex process that could involve refinancing. It can be difficult if the borrower already has bad credit and is struggling financially.
Credit Score Considerations
Bad credit borrowers should also consider a private mortgage, an interest-only temporary solution. The duration is one year; you can resign at your discretion. However, a co-signer is a better bet if you want to rebuild your credit history.
- If the borrower wants to start rebuilding a credit score, a co-signer who has a good credit profile can make it easier to switch from a private mortgage to a traditional loan. It’s an effective way to rebuild a credit history because private loans are considered stopgap measures.
- A co-signer takes on joint responsibility for all payments, including missed ones. If the borrower stays on track and makes timely payments, both credit scores can benefit greatly.
On the other hand, a guarantor’s name is not on the mortgage title, so there’s little chance of leveraging their credit profile to rebuild the borrower’s credit score.
Scenarios Where Co-Signers or Guarantors Are Beneficial
A co-signer or guarantor can help a borrower looking for a private mortgage in several situations.
Some people don’t have a traditional income source. Banks and credit unions usually look for T4 slips and several years of verifiable steady income. A private lender will accept contract and or sole proprietorship money. A co-signer or guarantor backing up their application makes for an even stronger case with a private lender.
Other people might have a bad credit score. They might have maxed out their credit cards or used a large percentage of their available credit, which can drive the score down. Late payments on loans and mortgages are reported to credit bureaus. Private lenders are more interested in the market value and equity in the property. If you have a bad credit score and you’re applying for a private mortgage, a co-signer or guarantor can help boost your chances.
The reason is simple. Private lenders are like their traditional counterparts because they want to mitigate the risk they take. Having either one of these backups on an application provides repayment assurances.
