So, you have found your dream home – everything from price, size, and location is perfect. The only thing standing in your way is getting the home loan approval required to make the purchase. If you fit the lender’s requirements, getting a mortgage can be pretty straightforward. If you fit these requirements, you can work with a mortgage broker in Sydney to simply complete the needed paperwork with your income, assets, deposit, and credit score.
This is the ideal scenario. However, it is not always the case for all borrowers. For many borrowers, they will need some additional help to secure the right loan. In that case, when you do not meet the lender’s requirements, you have the option to apply for a loan with a “guarantor’s” help. So, how does this loan work? What are its pros and cons? And is a guarantor loan worth it?
What is different about a guarantor loan?
Understanding the risk of a guarantor loan
Before asking your friends and family to sign on to your mortgage, it is crucial that you understand all the risks associated with this type of home loan. Your Lendstreet mortgage broker will be able to go through these with both you and your guarantor extensively. The main guarantor loan risks include:
Cases where you default on your home loan
In these cases, if you default on your home loan, your guarantor will need to pay for the entirety of the debt. When bringing on a guarantor, you must discuss ahead of time your financial status and if you will have any difficulties meeting bills and other payment obligations. You need to be as transparent as possible on how you plan to make repayments to your home loan, so that they fully understand how they fit in the picture, and the risks at play. When you know you cannot make a repayment, make sure to inform them ahead of time.
Remember that apart from needing to repay the entire debt amount, defaulting on your home loan will dampen your guarantor’s credit score as well as your own, making it hard for both of you to get loans in the future.
Being a guarantor may reduce their options of getting a loan
Guarantors applying for their own home loan need to inform lenders about existing loans wherein they are the guarantor. Lenders will factor this in as this means that the guarantor is already obligated to make a priority payment in the case that your home loan defaults, which could impact their own eligibility and reduce the possibility of them getting their desired loan.
Risk to your relationship
Money can often come between the middle of relationships. Apart from the financial effects of defaulting on your loan, it’s also important to consider the potential effects on your relationship with your guarantor, if something happens. Before your guarantor signs on, you should have an in-depth conversation regarding this topic to ensure that you are both on the same page.
Benefits of a guarantor loan
Frequently Asked Questions
What is a guarantor home loan?
Who can be a guarantor for my home loan?
How will a guarantor help me with my mortgage?
What does a guarantor on a mortgage do?
Does a guarantor have to provide any cash or pre-payments?
How much can I borrow with a guarantor mortgage in Australia?
Is a guarantor mortgage easy to get?