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Does a Co-applicant or Guarantor Affect How Much House I Can Afford?

4 min read | May 01, 2020

If you’re thinking about buying a home with someone else or don’t qualify alone for what you want, keep reading!

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Alex Leduc, CFAMortgage expert and startup guy

  linkedin-logo Alex Leduc

Do You Need A Co-Applicant or Guarantor?

When you're getting ready to buy a home, one of the first things you'll want to do is get pre-approved to determine the amount you qualify for. But what happens if you fall short of what you were hoping to buy? You'll likely be advised to add a co-applicant or guarantor to make up for any income, asset or credit score shortfalls.

Here are three questions you should ask yourself before adding a co-applicant or guarantor

1) Which option makes sense for you?

2) Can you financially support the deal?

3) Are there any cons for the co-applicant/guarantor?

 

Co-applicant Vs Guarantor: What's the Difference Anyway?

The basis of a co-applicant and guarantor is roughly the same. You leverage someone's income, assets or credit score to improve your application and qualify for more financing or a better deal. However, some critical differences between the two are worth mentioning.

Who needs to be on title?

On title means you are legally registered as an owner of the property and are on the mortgage. A co-applicant needs to go on title, while a guarantor does not. 

The benefit of being a guarantor vs co-applicant is that the mortgage wouldn't show up on your credit report and have no impact on your financial capacity. However, you'd have no legal ownership of the property (unless negotiated between parties in another agreement) while still being legally responsible for any missed mortgage payments.

Who is eligible to be a co-applicant or guarantor?

You can buy a property with almost anyone as your co-applicant (spouse, friend, parent, business partner, etc). 

As for guarantors, you have fewer options. Lenders will usually only accept a spouse or immediate family member. They may even require them to live in the property. 

Will I have fewer lender options if I use a guarantor?

Not all lenders allow guarantors. With fewer lenders to work with, you could end up paying a higher rate as options are limited. 

Just Because You Qualify Doesn't Mean You Can Afford

Let's take a look at two examples of someone using a co-applicant or guarantor to qualify.

Example 1: Credit score is not high enough to qualify for a mortgage offer

Let's say you found a mortgage offer with a low rate that required a minimum credit score of 620, but yours is only 610. Adding a co-applicant or guarantor with a high credit score can help you qualify for that offer. In this scenario, a lower mortgage rate leaves you better off.

Example 2: Qualifying income is only 50% of what you need

If you made $50,000 but needed $100,000 of qualifying income to qualify for the home you wanted, adding a co-applicant or guarantor with over $50,000 in qualifying income would qualify you for that mortgage. 

This could make sense if you make over $100,000 through self-employment income, but your tax documents only show $50,000. But if that co-applicant or guarantor can't help you pay for the mortgage payments, property taxes, condo fees, and other associated costs, you're still responsible for making those payments in full. If you can’t, you'll eventually default on your mortgage and lose your home.

What Are The Cons of Being A Co-Applicant or Guarantor?

There are so many reasons why adding a co-applicant or guarantor is a good idea. But it's important to consider if it's in the best interest of your potential co-applicant or guarantor. 

Here are some reasons why you may want to think twice before agreeing to become a co-applicant or guarantor.

  • The mortgage payments will be reflected in the co-applicants credit report. If they were to try to buy a new home or apply for any debt financing, their application would be impacted by the additional mortgage payments. It may result in them not being able to get the loan or financing they need. 
  • Co-applicants or guarantors are legally responsible for any missed mortgage payments. So if you are unsure about your ability to repay and they can't cover your mortgage payments, you'd be putting yourself and your co-applicant/guarantor in default if you missed mortgage payments.
  • If your potential co-applicant is a first-time homebuyer and they go on your deal as co-applicant, they have now legally purchased their first home. It would result in them losing their ability to participate in specific programs (ex: land transfer tax credits) for a purchase in the future, which could result in high closing costs or lower payment options.

These are just a few examples. Your mortgage professional and lawyer can help you navigate these scenarios early on during the pre-approval process to assess if it makes sense for both parties.

Looking At The Full Picture

We want to stress that adding a co-applicant or guarantor to your deal means the good and the bad get factored in. Let's say your co-applicant or guarantor makes a lot of income but has a lot of outstanding debts; it may lower your pre-approval amount. Make sure you run the numbers with your mortgage professional as part of the pre-approval process to determine the impact of adding/removing a guarantor or co-applicant on a deal.

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