Being a first-time home buyer can be an exciting experience but also challenging, especially if you know that your financial situation or credit score isn’t strong enough to have you secure a mortgage. In this case, having a guarantor as your backup can make a big difference.
This article will help you get an idea of what a guarantor does, who you can get as a guarantor, what is their roles, as wells as the pros and cons of involving a guarantor in your journey to be a first-time home buyer.
What Is a Guarantor?
A guarantor is someone who will be responsible for you financially if you don’t have any means to make payments anymore. By getting a guarantor, first-time homebuyers can reduce the risk for lenders to eliminate the need for Lender’s Mortgage Insurance or LMI.
For instance, buyers who don’t have a 20% down payment can get a guarantor so they will be approved for a mortgage. It can also help them to get lower interest rates, get better terms, or even access a larger loan amount.
Who Can Be a Guarantor?
Guarantors are typically your close family members such as parents or siblings, who meet the specific requirements below:
- Good Credit: Lenders require guarantors to have a strong credit history.
- Stable Income: A steady financial situation is important.
- Savings History: A record of reliable savings habits.
Moreover, the guarantor should also be willing to take on the financial responsibility if the borrower don’t have the ability to pay the loan anymore. That’s the reason why lenders carefully evaluate guarantor’s financial stability to ensure that they can handle the risk.
Remember that being a guarantor is a serious commitment that should not be taken lightly, so it’s crucial for anyone considering this role to fully understand the implications.
What Does a Guarantor Do?
The primary role of a guarantor is to help the buyer secure a mortgage. But here are the other things that they can assist you with:
- Providing security: The guarantor promises to cover loan repayments if the borrower fails, which gives the lender confidence.
- Improving access to credit: With a guarantor, buyers may qualify for loans that they couldn’t get on their own.
- Helping loved ones: Guarantors often step in to support their family members to achieve homeownership.
The Pros and Cons of a Guarantor
Pros
- Easier loan approval: First-time buyers with financial challenges may qualify for a mortgage.
- Better loan terms: Lenders might offer lower interest rates or waive additional fees like LMI.
- Support for loved ones: It allows families to help each other achieve milestones like buying a first home.
Cons
- Financial risk for the guarantor: If the borrower can’t make payments, the guarantor is legally obligated to cover the debt.
- Credit impact: Missed payments by the borrower can harm the guarantor’s credit score.
- Eligibility requirements: Guarantors need to meet strict financial criteria, which might add strain.
- Emotional stress: This arrangement requires trust and can create tension if responsibilities aren’t met.
Final Thoughts
Having a guarantor can be a game-changer especially if you are a first-time homebuyer who doesn’t have the necessary means to get a mortgage. However, it’s important to weigh the risks and responsibilities carefully since being a guarantor is a serious commitment. Borrowers should ensure that they can manage their loans, while guarantors must understand the financial and legal implications of the role.
Getting in touch with a mortgage broker can help provide clarity and help both parties make informed decisions.
