Deciphering Co-Signer vs. Guarantor: Understanding the Key Differences

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For those looking to purchase their first home or boost their borrower profile, adding a co-signer or a guarantor to their mortgage application can make all the difference between getting the necessary financing and being rejected. On the other side of the fence, acting as a mortgage co-signer or a guarantor can bring the satisfaction of helping your loved one get their foot in the door of the Canadian real estate market.

But what exactly is a mortgage co-signer vs. guarantor, and which option is right for your situation? Although the two concepts are similar, a mortgage co-signer is not the same as a mortgage guarantor and carries a different level of responsibility and involvement. Together, let’s explore further the key differences between a co-signer vs. a guarantor to help you decide which option best suits your needs.

What is a Co-Signer?

Understanding the roles of a co-signer and a guarantor is crucial when entering the Canadian real estate market and mortgage applications. A mortgage co-signer can provide additional assurance to lenders when they have concerns about the primary borrower’s ability to repay the mortgage, but this extra level of security comes at the cost of certain legal and financial obligations for the co-signer themselves.

Definition and Role of a Co-Signer

A mortgage co-signer is a person who can help a mortgage applicant qualify for a loan in cases when they aren’t able to do so on their own. Including a co-signer on a mortgage or loan application means that more than one person is responsible for ensuring that the loan is repaid. This, in turn, reduces the lender's risk and increases the chances of the mortgage application being approved. In simple terms, lenders like co-signers and are more likely to extend funds to applicants who include co-signers on their mortgage applications.

Responsibilities and Obligations of a Co-Signer

Both borrowers and co-signers are equally responsible for paying back the loan, and both are added to the mortgage and the home’s title, assuming shared home ownership. The co-signer may or may not make regular mortgage payments, but they will immediately assume this responsibility should the primary borrower default. This joint responsibility is reflected on both the borrower’s and the co-signer's credit reports, equally impacting the credit history of both individuals.

Examples of Situations Where Co-Signers Are Commonly Used

Generally, a co-signer is required if the primary applicant can’t qualify for a mortgage on their own merit due to a subpar credit profile or inconsistent income. Oftentimes, parents choose to act as co-signers for their children to help them qualify for a mortgage, particularly if they are purchasing their first home and have a limited credit history, insufficient income, or have received a denied mortgage application in the past.

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What is a Guarantor?

While most lenders will allow adding a co-signer to the mortgage application, only some will allow including a guarantor. Becoming a guarantor generally carries less responsibility than becoming a co-signer—but it also means that a guarantor can only give a small boost to the primary borrower’s application.

Definition and Role of a Guarantor

A mortgage guarantor is somebody who “guarantees” to take over mortgage payments in case the primary borrower defaults. The guarantor's name appears on the mortgage agreement but not on the property title, meaning that the guarantor has no ownership interest in the property. Nonetheless, the extra layer of security provided by the guarantor can increase the chances of mortgage approval or ensure more favourable rates and terms for the primary applicant.

Responsibilities and Obligations of a Guarantor

Unlike mortgage co-signers, guarantors aren’t added to the property title. While they are not directly involved in the ownership of the property, mortgage guarantors are included in the mortgage documents and have a certain level of responsibility for making loan payments should the primary borrower fail to do so. 

If the borrower defaults, the guarantor will not automatically assume responsibility for mortgage payments. Instead, the guarantor will only be held liable after all the other means of mortgage repayment have been exhausted. Nonetheless, failure to make mortgage payments may negatively impact the guarantor’s own credit history.

Examples of Situations Where Guarantors Are Commonly Used

Guarantors are commonly used when the primary applicant needs a small boost in their application—often when securing their first mortgage. For instance, a young home buyer may need to use a guarantor if they can qualify for the loan based on their income but have a limited credit history or a poor credit score.

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Key Differences Between Co-Signers and Guarantors

Both mortgage co-signers and guarantors act to strengthen the primary borrower’s application. However, the two parties have slightly different roles and levels of responsibility, with mortgage co-signing generally being a more involved option.

Legal Liabilities and Obligations

  • A mortgage co-signer is added to both the mortgage agreement and the home title, which makes the co-signer a partial owner of the home. While a co-signer may or may not contribute to regular mortgage payments, they become partially responsible for the overall mortgage liability and will be required to immediately take over the payments in case the primary borrower fails to meet their financial obligations.
  • A mortgage guarantor acts as an additional “safety net” for the lender and is often used when an application only needs a slight boost. A guarantor’s name appears on the mortgage loan but not on the home title, meaning that they do not take part in the home ownership. Guarantors also aren’t responsible for regular mortgage payments. Instead, they will only need to take over the payments in case the primary borrower defaults after all other means of collection have been exhausted.

Impact on Credit Scores

  • Because a mortgage co-signer partially owns the home, the mortgage liability will be reflected on their credit report. This can negatively impact the co-signer’s ability to secure additional loans or their own mortgage in the future. Plus, any misstated or late mortgage payments are guaranteed to negatively affect the co-signer’s credit score and overall credit profile.
  • A mortgage guarantor, on the other hand, does not take on any property ownership, which means their credit report remains unaffected. However, any missed mortgage payments may still have a negative effect on the guarantor’s credit history.

Consent and Approval Requirements

  • With most mortgage loans in Canada, adding a co-signer is possible. A mortgage co-signer must have a steady income and an excellent credit history, and, of course, the co-signer must give their consent to be included on the mortgage application. Unlike mortgage guarantors, co-signers must also meet the acceptable limits of the debt-to-income ratio.
  • Not all lenders will allow adding a guarantor to a loan application. Even if they do, the specific requirements may vary from loan to loan. If adding a guarantor is possible, most mortgage lenders will require the guarantor to be a Canadian citizen or a permanent resident, have a stable and reliable income, and have a clean credit history with a strong credit score of 650 or more. Just like a co-signer, a guarantor must give their consent to be included on the mortgage application.

Release from Responsibility

It is rare for lenders to release mortgage co-signers or guarantors from their responsibilities. If the primary borrower wishes to remove a co-signer or a guarantor from their mortgage agreement, they would need to refinance or apply for a mortgage switch, which requires them to qualify for the new loan on their own. Alternatively, the primary borrower may use another co-signer or guarantor when applying for the refinance.

Pros and Cons of Co-Signing vs. Guaranteeing

Whether you are asked to act as a co-signer or a guarantor for a mortgage, you will enjoy the ability to make a difference in somebody’s life by enabling them to achieve their homeownership goals. At the same time, you will be putting your own financial well-being on the line. So, ensure that you carefully evaluate the pros and cons of being a co-signer vs. guarantor before making the decision.

Advantages of Being a Co-Signer

Generally speaking, becoming a co-signer does not have any advantages for the co-signer themselves other than helping a loved one purchase their dream home. If you act as a mortgage co-signer for a close family member or a friend, you may enjoy the satisfaction of helping them qualify for a mortgage or secure more favourable loan terms.

Advantages of Being a Guarantor

Similarly to being a co-signer, becoming a mortgage guarantor can act as an avenue for you to help a close family member or a friend achieve their homeownership goals. In addition, acting as a guarantor carries less responsibility than acting as a co-signer and will not affect your credit profile as long as mortgage payments are made on time.

Potential Drawbacks of Each Role

If you are considering becoming either a guarantor or a co-signer, there are several factors you should keep in mind:

  • Limited borrowing ability. Co-signers are linked to the mortgage and take on partial ownership of the property. This means that the mortgage appears on the co-signer’s credit report and potentially limits their ability to secure additional loans in the future.
  • Potential impact on credit score. While becoming a mortgage guarantor doesn’t have the same credit implications as becoming a co-signer, the guarantor’s credit may also be negatively impacted due to late or missed mortgage payments.
  • No easy way out. Once you become a mortgage co-signer or a guarantor, you will be responsible for mortgage payments in case the primary borrower defaults. There is no easy way out of this responsibility until the borrower is able to qualify for a mortgage refinance on their own (or secures a mortgage with another co-signer or guarantor).
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Factors to Consider Before Co-Signing or Guaranteeing

Aside from the pros and cons of supporting somebody else’s mortgage application, it’s crucial to consider your relationship with the borrower, their and your own financial situation, and legal risks and obligations associated with co-signing or guaranteeing.

Relationship With the Primary Borrower

Most of the time, the role of a mortgage co-signer or guarantor falls on close relatives or friends who wish to help their loved ones achieve their homeownership goals. As a co-signer or guarantor, you will be taking on certain financial risks and obligations, so ensure that the primary borrower is someone you trust.

Financial Stability and Ability to Fulfill Obligations

Before agreeing to have your name added to the primary borrower’s mortgage, carefully evaluate their financial situation and ability to make regular mortgage payments. By carefully choosing who to co-sign or guarantee for, you will be able to minimize the risk of being faced with mortgage payments yourself. In addition, ensure that you have the financial means to cover the mortgage payments yourself, should this responsibility fall on your shoulders.

Legal Implications and Risks

Before signing any mortgage documentation, think carefully about the legal responsibilities associated with this signature. If the borrower defaults, you may be held liable for the full amount of the debt—plus, your credit score and financial reputation might take a hit.

Alternatives to Co-Signing or Guaranteeing

If you realize that you are not ready to act as a co-signer or a guarantor for the primary borrower, you may encourage them to find another co-signer, use a different type of collateral, or even work with private lenders. The best option for the borrower is always to improve their creditworthiness and try qualifying for the loan on their own, albeit this may take a few months.

Tips for Making Informed Decisions

If you are asked to act as a mortgage co-signer or guarantor, this decision should never be taken lightly. After all, you are putting your own creditworthiness on the line and risking significant legal and financial implications should the primary borrower default. Nevertheless, acting as a co-signer or a guarantor is sometimes the only option to help a loved one purchase the home of their dreams, so think carefully, consider all the pros and cons, and do your best to make a thoughtful, well-informed decision.

Researching and Understanding the Terms of the Agreement

Take time to carefully review the documentation and thoroughly understand all terms, conditions, and obligations outlined in the agreement. Ensure that you know the difference between becoming a co-signer vs. a guarantor, and choose the option you are most comfortable with. 

Also, remember to review the mortgage repayment schedule, interest, fees, and any potential penalties or charges. Finally, keep in mind that a mortgage refinance is often the only way for the guarantor or co-signer to free themselves from the associated financial and legal obligations, so examine the mortgage term and potential refinance options.

Communicating Openly with the Primary Borrower

Have an open and honest discussion with the primary borrower about the expectations and responsibilities of all parties involved with the mortgage. 

  • How will the loan be managed? 
  • Will the guarantor or co-signer have any ongoing responsibilities? 
  • What will happen in unforeseen circumstances or in the case the co-signer no longer wishes to have their name on the loan?

Discuss these and any other potential risks and possible situations in detail and document the consensus.

Seeking Legal or Financial Advice If Uncertain

Should you have any questions or doubts, working with an experienced legal or financial professional can help set your mind at ease. If you wish to discuss the legal or financial implications of acting as a co-signer vs. guarantor, better understand potential risks, or explore alternative options, don’t hesitate to reach out to me. I will be more than happy to walk you through everything you need to know to make an informed decision and help you or your loved one secure the financing they need to become a homeowner.

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About Andrew Thake

Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.

Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.

Why not make your mortgage experience a comfortable one?

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