Who Can Be a Guarantor for a Loan? A New Borrower’s Guide

Many lenders will require you to have someone who can guarantee for you if you don’t meet the standard criteria for a mortgage loan. That’s where a guarantor comes into the picture. 

But who can be a guarantor for a loan, and what are their responsibilities? Stick around as we go into details and explain all the nuances that come with that. 

Let’s dive in!

Who Qualifies as a Guarantor?

Not anyone can become a guarantor for a loan. Having a guarantor on a loan means that the person guarantees you that all payments will be executed promptly. 

Here is a brief breakdown of the basic requirements for a person to become a loan guarantor

Residency

First and foremost, the person that is guaranteeing a loan for you can’t be someone that lives abroad. It must be someone that not only is a resident of Canada with a Canadian address but lives there at the time of the loan request.

Age

A guarantor on a loan can be anyone of legal age. Depending on the province, you’ll need to be either 18 or 19. However, the maximum age limit is 75 years old. Lenders do not allow people older than 75 to be a guarantor due to the higher risk of death by natural causes. 

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Credit Score

Lenders require a good credit score in order to qualify for a loan. Typically, a guarantor in Canada is required to have a higher credit score than the co-signer when guaranteeing a loan

That means that the guarantor must show a solid credit history and have a score of at least 650 or higher. 

Income

Technically, a guarantor in Canada doesn’t have to be employed at the time of taking out the loan. Still, they must show they’re financially capable of keeping up with the payments if the primary borrower defaults

The lender will also ask you to provide documentation regarding your income to see if you qualify to guarantee for the borrower. Because the moment the borrower stops with the payments, the guarantor is taking over the legal responsibility of re-paying the rest of the loan. For this reason, it’s important for the guarantor to have a stable job or some sort of revenue

If you need extra income, read about the Top 10 Safe Investments With High Returns in Canada

Do Guarantors Need a Credit Check?

In short, yes. We have already mentioned that having a solid credit score is an essential element when guaranteeing a loan. It is one of the basic requirements when qualifying for a guarantor. To confirm creditworthiness, lenders will perform a credit check

Doing so allows lenders to determine whether guarantors are meeting the criteria for becoming a loan guarantor

If you want to find loans with no credit checks, then this article is for you: Loans in Canada With No Credit Check: 2022’s Best Lenders

How to Become a Guarantor?

The process of becoming a guarantor involves certain steps that serve to prove the guarantor’s credibility. 

Keep reading for a step-by-step guide on becoming a guarantor on a loan.

Prove Your Eligibility

A guarantor in Canada is required to provide valid documents to prove their eligibility. Lenders will want to check the guarantor’s employment status, and they will request a letter of employment. 

Furthermore, the guarantor must show identification and provide the lender with a bank statement and statement of assets. After confirming their eligibility, they shall proceed to the next part of the procedure. 

Sign a Guarantee Document

Once you get your approval, you need to sign a guarantee document. Make sure to request a copy of the loan agreement before signing the document, as well as a copy of the rest of the documents. It’s important to know what you’re committing to before signing the agreement. 

Guaranteeing someone that a loan will be repaid in its full amount is a huge responsibility, so make sure you read the fine print before proceeding.

Things to Beware of When Becoming a Guarantor

There are a few important factors to keep an eye on before committing to becoming someone’s guarantor for a loan.

First, find out whether the agreement is referring to a non-financial or a financial guarantor. 

A non-financial guarantor agreement means that you’re the next person to be contacted if the borrower misses a payment. This contract does not include collateral, so you’re not risking having your property seized. 

On the other hand, a financial guarantor agreement involves collateral, meaning you are obliged to pay off the loan if the borrower fails to do so. Otherwise, you’re at risk of losing your property

And most importantly, read the terms and conditions under which you will be required to take over the loan if borrowers default on the loan. 

Here are some essential questions to ask yourself before guaranteeing a loan:

  • Does being a guarantor on a loan will affect your borrowing power in the future?
  • Can you trust the borrower that they’ll make on-time payments?
  • Is your income sufficient to cover any missed payments? 
  • What is the loan amount you’re signing up for as a guarantor?
  • What assets will you need to put as collateral?

Finally, be sure to ask about the possibility of stopping being a guarantor for a loan and the consequences. Generally, you’re not allowed to exit the guarantor agreement until the full loan is repaid. So, think thoroughly if being a guarantor will put you under financial strain. 

Guarantor vs. Co-Signer

Although a co-signer and a guarantor serve to help those who can’t qualify for a loan on their own, they are essentially two different roles.  

On one hand, a guarantor is someone who guarantees that payments will be always on-time and offers extra assurance in case the borrower is not able to continue with the monthly payments. 

Contrastingly, a co-signer is someone who shares equal financial responsibilities for the mortgage just as the original borrower and is a co-ownership of the home. 

Interested in finding the best mortgage rates in Canada? Check out our review of the Top Canadian Mortgage Lenders in 2022

Nevertheless, both guarantors and co-signers need to have a solid financial history and good credit scores. 

Let’s take a look at the key differences between guarantors and co-signers.

Guarantor 

  • A guarantor signs the agreement, but their name does not appear on the home’s title
  • A guarantor is not a co-owner, nor are they entitled to ownership of the borrower’s home 
  • Responsible for continuing the payments from the moment that the primary borrower stops paying
  • Guarantor serves to boost the borrower’s application process 
  • A guarantor is required to have a better financial situation than a co-signer

Co-Signer

  • The co-signer’s name appears on the home’s title 
  • A co-signer is required to sign all the mortgage documents 
  • A co-signer is bound to legal responsibility for the entire mortgage loan should the borrower default
  • A co-signer co-owns the property with the borrower and is held accountable if the borrower stops with the payments
  • A co-signer is needed when the borrower has a bad credit score

Essentially, both a guarantor and a co-signer can help those who have an inadequate credit history to qualify for a mortgage loan. As a co-signer, if you live in a shared house with the borrower, you risk eviction from the house as well if both of you fail with the payments. 

Being a co-signer and sharing a joint household with the borrower means that even if you have been regular with your rent, it does not prevent you from eviction. 

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Responsibilities of Becoming a Guarantor

Being a guarantor on a loan comes with several responsibilities. Here’s what you can expect:

Responsibility for Payments

If you’re comfortable with the fact that you’re bound to take over the payments in an event of a borrower’s default, then you might be ready for such an act. A guarantor in Canada ensures that the debt will be repaid, regardless if the borrower stops paying. You’re responsible for continuing the monthly payments in such a scenario.  

Your Credit Can Be Affected

Having solid credit is essential for your future borrowing power. So you must become familiarized with the fact that if you’re unable to back up the borrower financially, it will hurt your credit. It means that if you fail to cover the missing payments, your credit profile will be inevitably affected in a negative way.  

Ask the Borrower to Get Insurance

As a precaution, it’s good that the guarantor for a loan and the borrower discuss the possibility of getting insurance. The insurance is intended for borrowers who suffer a disability that prevents them from working. The insurance also covers the loan if the borrower passes away.  

Having insurance is adding an extra protective layer in unfortunate events, and the guarantor will be spared the legal repercussions if something happens to the borrower. 

Conclusion 

We hope this guide cleared up the confusion surrounding the responsibilities of a guarantor on a loan and helped you learn the key differences between a guarantor and a co-signer.

It’s important to know what guaranteeing a loan entails in order to help you determine if you’re ready for such a commitment. 

FAQ

Can you use a family member as a guarantor?

As long as the parent or a family member meets the eligibility requirements, they can act as a guarantor for a loan.

Can a friend be a guarantor for a personal loan?

Yes, as long as the friend has a record of timely payments and proves to be a liable person with a good credit score.

Who can be a guarantor for a loan in Canada?

Any Canadian resident of legal age can become a guarantor on a loan in Canada. However, they also must have a solid financial history and good credit scores. 

ABOUT AUTHOR

When Angela combined her deep-seated love for linguistics with her growing interest for finance and money management, she struck a gold mine. She’s scoured the internet far and wide for all things related to money and finances, including payments, budgeting and investing. Now she’s eager to share her knowledge and skills with the world, determined to make it a better place. In her free time, she loves to read a good book.

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