Getting your first home can be a daunting task for many individuals, especially when you do not have the financial muscle to foot all the necessary expenses. It is even worse when you do not qualify for a mortgage due to your credit score or lack of funds. However, with a guarantor, things can be a little bit easy. Guarantors are individuals or entities that step in to support first-time homebuyers to secure a mortgage. In this post, we will discuss the roles, eligibility, pros, and cons of a guarantor.
A guarantor is someone who promises to cover the borrower's debt in the event that they can't make their payments. This may lessen or even eliminate the need for lender mortgage insurance (LMI), hence lowering the risk of loss for the lenders.
This can be particularly beneficial if you are a first-time home buyer with a down payment amounting to less than 20% of the value of your selected house since having a guarantor on the loan, lenders are more likely to accept you as they have someone else backing up the mortgage payments. This can result in lower interest rates, better repayment terms and access to a bigger loan amount.
Lenders will typically require that the guarantor has good credit, a steady income and reliable savings history. Guarantors should also be close family members like parents or siblings and must be willing to take on all financial obligations of the loan if the borrower defaults. So before approving a guarantor, lenders will take extra caution to assess their financial and personal strengths.
Furthermore, it's important that potential guarantors understand the severity of the situation and why they are being asked to play such an important role in this process. They should be confident in their ability to make good on any responsibility laid upon them. Keep in mind that choosing the correct guarantor might significantly improve your chances of receiving the loan you require.
The primary role of a guarantor is to support the first-time homebuyer in acquiring a mortgage loan, and they can also help with a range of situations, including:
As a guarantor you will be legally responsible for repayments if the borrower defaults on their loan, so it is important to understand the risks before entering into this arrangement and that you should also seek legal advice.
The pros of having a Guarantor are that they can help you qualify for a loan or apartment rental that you may not be eligible for on your own. Additionally, they can provide extra financial security and peace of mind if you’re worried about falling behind on payments. Having them as part of the process also shows lenders and landlords that you have someone to vouch for you who can be held accountable if necessary.
On the other hand, there are some potential drawbacks to having a Guarantor. As the guarantor, they must agree to pay your debt or lease in case you cannot do so yourself i.e., if you’re unable to make payments on time or default on a loan. This means that they are taking on financial responsibility for you and may be risking their own credit score in the process. They must also meet certain financial requirements, depending on the loan or rental agreement, which could put extra strain on them if they don’t qualify. Finally, having a Guarantor can be stressful for both parties as it requires trust and communication between them in order to ensure that the responsibilities are being met.
A guarantor can be a great ally in helping first-time home buyers get approved for their first mortgage. However, before agreeing to be a guarantor, it's essential to understand the risks and responsibilities involved. It would also be wise to consult an experienced real estate lawyer or mortgage broker to help navigate the process and ensure that you're making an informed decision. In conclusion, if utilized carefully and with the right precautions in place, a guarantor can be a valuable tool in facilitating fast-tracked homeownership for first-time home buyers.