What’s The Difference Between A Guarantor And A Co-Signer?

What Is A Guarantor?

A guarantor is someone who vouches for the primary borrower financially. The primary borrower can have a friend, family member, or even a third-party service as a guarantor, provided that they don’t live with the primary borrower. The guarantor signs and agrees to the terms that are set and ensures that payments are made on time in case the primary borrower is unable to make the payments.

What Is A Co-Signer?

A co-signer is someone, aside from the primary borrower, who is responsible for paying back a loan. The loan usually is co-signed by a family member. The co-signer is obliged to pay any missed payments or even the full amount of the monthly payments on the rental property if the primary borrower does not pay. The primary borrower can harm the co-signer’s credit score by making late payments. Co-signer gives an additional layer of assurance to the lender or the landlord that the loan or rent will be repaid, according to the Consumer Financial Protection Bureau (CFPB). The CFPB is a U.S. government agency that ensures that consumers are treated fairly by financial institutions, such as banks and lending or credit companies.

Are You Liable As A Co-Signer Or Guarantor?

Yes, you are liable as a co-signer or guarantor. As a co-signer or guarantor, you can be contacted by the lender or the landlord if the primary borrower fails to make the rent payment of the rental property on time. When the defaulted loan is turned over to a collection agency, there is a high chance that the overdue payments are present on your credit report. Your credit report can be affected negatively in which future loans with preferred interest rates can be difficult to obtain.
There is a slight difference in your liability as a co-signer or as a guarantor. You can only be contacted or pursued by the lender or the landlord after contacting the primary borrower because of overdue payments. For overdue payments, you have equal financial responsibility with the primary borrower. If the primary borrower misses the loan payment or rent on time, you must be the one responsible for assuming the whole monthly payment.

Can You Choose A Guarantor Role To Reduce Financial Exposure?

Yes, you can choose a guarantor role to reduce financial exposure because a guarantor does not have ownership of the property or asset where the loan was used. If the said property or asset loses its value, the guarantor is not affected by it.
On the other hand, if the guarantor pledges an asset as collateral, this will increase the financial exposure if the primary borrower fails to make the loan payments and the lender decides to use the collateral to pay back the loan.

As A Guarantor Or Co-Signer, Can You Exit The Agreement?

As a guarantor, you cannot exit the loan or lease agreement. The loan or lease agreement with the lender or the landlord states that your credit history, employment status, and other influences all had an impact on the loan approval of the primary borrower.
The primary borrower, on the other hand, can remove you as a co-signer from the agreement. The agreement between the lender and the primary borrower can be modified upon the request of the primary borrower. The primary borrower can sign the co-signer release form to release you from the loan obligations as a co-signer. The co-signer release form must be approved by the lender in order to remove you as a co-signer and the process is different depending on the loan type. A refinance is usually required if it is a mortgage.

What Role Does A Co-Signer Or Guarantor Play?

The role that a co-signer plays is to help the primary borrower to pay back the loan together and solidify the credit profile of the main borrower. If the loan is not paid by the primary borrower, the role of the co-signer is to pay the missed payments or the full amount of the loan or rent. The loaned or leased property is equally shared by the primary borrower and the co-signer, which is why both of them share the same role and financial obligations in the loan or lease agreement.
The role that a guarantor plays is to have the legal responsibility of paying the loan if the primary borrower does not make the loan or lease payments. A guarantor may also be required to pledge the assets as collateral for the lender or the landlord if the primary borrower defaults on the loan obligations.

Can There Be More Than One Guarantor?

Yes, there can be more than one guarantor. Having more than one guarantor means that there will be combined incomes and more people who will be responsible for the loan or rent if the primary borrower defaults. The primary borrower must make the guarantors sign the guarantor agreement and agree to the changes.

Who Can Be A Guarantor Or A Co-Signer?

A guarantor can be a person who is a parent, family member, close friend, or a third-party company. This person must have a stellar credit history and financial standing to cover the payments when the primary borrower defaults.
A co-signer can be a spouse, a parent, or a friend. The spouse is not required to be a co-signer, according to the Consumer Financial Protection Bureau (CFPB). The CFPB states that unless both the primary borrower and spouse are applying for the loan, the spouse is not required to be the co-signer.

When Is A Co-Signer Or A Guarantor A Good Option?

A co-signer is a good option if the primary borrower has bad credit issues. Bad credit issues in the form of poor credit scores or insufficient credit history or rental history can be addressed by getting a co-signer. A co-signer is also a good option when the primary borrower has employment gaps or a limited employment history. The primary borrower may also need a co-signer if the debt-to-income (DTI) ratio is high. A high DTI ratio means that the primary borrower has a lot of debt to pay in comparison to the income.
A guarantor is a good option if the primary borrower wants to get a loan or lease much easier. The primary borrower can also get a higher amount of loan with a guarantor. A guarantor is also a good option to improve the credit history of the primary borrower.
Call the Cain Mortgage Team to see if a co-signer is a good option for you to help become prequalified!