Considering the state of Canada’s booming real estate market, it’s almost a guarantee that you’ll need a mortgage if you wish to purchase property. However, tight budgets and low wages can make it difficult to qualify for a mortgage with a high principal. If you have a shaky credit score, you’ll have an especially tough time securing an adequate mortgage on your own, leading to additional financial headaches. Fortunately, a mortgage guarantor can help you to obtain a mortgage despite having a low credit score or income, allowing you to substantially improve your prospects while house-hunting.
What is a mortgage guarantor?
A mortgage guarantor is similar to a co-signer: both are responsible for the debt should you miss a payment, making the loan application more attractive to lenders. However, co-signers are also partial owners of the property, preventing you from retaining full ownership. Additionally, if someone co-signs for your mortgage and later transfers their portion of the property to you, you may have to pay tax on the gains. In contrast, guarantors do not have their name on the property’s deed. They are listed on the loan paperwork only, allowing you to retain full ownership of your property and avoid legal headaches.
What requirements does my guarantor need to meet?
Guarantors should be attractive mortgage applicants. They must have a high credit score, a low debt utilisation ratio, and should have a stable job and high income; a low income may be supplemented by a significant net worth, though it is not recommended. Lenders may have additional requirements for guarantors, such as owning their own property in Canada.
How do I get a guarantor mortgage approved?
If you’d like to apply for a mortgage with a guarantor in Canada, you’ll have to go through a few steps. Fortunately, the process is relatively similar to applying for a mortgage on your own, minimising any potential headaches or troubles. That is good news.
Step 1: research lenders
To begin, you’ll need to research different mortgage lenders’ rates and ensure that they offer guarantor-backed options. Traditionally, mortgages are only applied to by the borrower, so you may need to ensure that the lender will accept a guarantor-backed application. Most lenders do accept guarantors since they understand that mortgages are difficult to qualify for, but it’s still important to do your research.
While searching for a mortgage lender, it’s also very important to compare rates and term details. A fixed-rate mortgage charges a consistent interest rate each month, while a variable-rate mortgage has its interest rate set by the lender each month. Be sure to carefully examine all of your options. Although a 0.1% difference in your interest rate might seem trivial at first, the mortgage’s large principal and inevitably compounding interest can cause that seemingly insignificant difference to burn through your wallet. Similarly, term details can have a big impact: a shorter term allows you to change your interest rate sooner, while a longer term locks your mortgage into your interest rate for a long period of time. Although it’s hard to predict future interest rates, securing or switching into a lower interest rate can save you thousands of dollars.
Step 2: Find a guarantor
You’ll need to find a guarantor before you begin to submit your mortgage application. You may wish to ask family members or close friends to act as your guarantor. However, be sure to choose wisely: money troubles can ruin relationships. It’s best to ask someone who you can communicate openly with. Ideally, you should have also previously de-escalated conflicts with this person.
Most people are understandably wary of accepting responsibility for others’ debt. To alleviate concerns, consider developing a budget or payment plan that you can show to prospective guarantors. If they see that you’ve done your research, they will be more likely to trust you.
Of course, it doesn’t hurt to point out the benefits, either. Although guarantor mortgages primarily benefit borrowers with a weaker credit score or lower income, the arrangement can also benefit guarantors. Their credit profile will further diversify and regular payments will help to build their credit score. Of course, guarantors already have high credit scores and their position does come with considerable risk, but acknowledging the potential benefits might help to win support.
Step 3: prepare your paperwork
Before applying for your mortgage, be sure to get all of your required paperwork together. In addition to both your and your guarantor’s government-issued ID, you should ensure that you have your guarantor’s proof of employment, proof of income, including wages, investments, and any other income sources. You need a list of their assets and liabilities, banking statements, and bank account information. You may also need to provide your own equivalent files. If you are considering a particular property or have already put in an offer, be sure to bring any relevant documents like the property listing, property taxes and annual fees, any contracts, etc.
While preparing your paperwork, you should also carefully review the information for any errors or inconsistencies. An innocent typo might raise flags on your application and cause the lender to deny your mortgage request. This is also a good chance to ensure that your credit score does not contain errors, potentially impacting your credit score.
It’s important to note that each lender may have different documentation requirements. Be sure to check your prospective lender’s website for a full list of the information that you will need to provide. Good preparation will save you time in the end.
Step 4: File your application
Once you’ve gotten all of your paperwork in order, you can file your application! To improve the chances of your mortgage being approved, the guarantor should refrain from making large ticket purchases, applying for additional loans, quitting or changing their job, and running hard credit checks. Too many hard credit checks on a credit file will hurt their credit score and may jeopardize the deal.
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About The Author: Arthur Dubois
Passionate about personal finance and financial technology, Arthur Dubois is a writer and SEO specialist at Hardbacon. Since his arrival in Canada, he’s built his credit score from nothing.
Arthur invests in the stock market but doesn’t pay any fees because he uses National Bank Direct Brokerage online broker and Wealthsimple’s robo-advisor. He pays for his subscriptions online with his KOHO prepaid card, and uses his Tangerine credit card for most of his in-store purchases. When he buys bitcoins, it’s with the BitBuy online platform. Of course it goes without saying that he uses the Hardbacon app so that he can manage all of his finances from one convenient place.
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