Understanding Mortgages with a Parent as a Guarantor

Parents want their children to have the best of everything. We have dreams that they will grow and bloom into the bright, happy people we know they can be. We also want them to have every possible advantage in life.

For most parents, there is little you would deny your children. If you have the means to offer financial help, you are happy to do so. Sometimes, though, your adult children need a different kind of help from you. This help comes in the form of assistance getting a first mortgage by acting as a guarantor for that mortgage.

What Is a Guarantor Mortgage?

Guarantor mortgages are mortgages in which someone else or another entity acts as a guarantor for someone else’s mortgage loan. Many people well into their 20s and 30s are still struggling to find a solid footing in the mortgage marketplace. Either their income is too low, their debt is too high (sometimes thanks to skyrocketing student loan debt), or they have too little credit history – or an insufficient credit score for many lending-reluctant banks to work with.

That’s where guarantors come into the picture. When parents act as guarantors for an adult child’s mortgage, they leverage their own money or property as collateral for their child’s mortgage. By doing this, the parents are agreeing to step in make mortgage payments on their child’s behalf if the child becomes unable to do so.

In some cases, the benefits of a guarantor mortgage are even greater as some lenders will allow adult children to use the equity in their parents’ home as part or all of the down payment. A guarantor mortgage allows many adults who would otherwise be unable to do so to achieve their dreams of homeownership. Some are even able to do so at preferred interest rates based on their parents’ good credit and tireless years of timely payments.

How Do Guarantor Mortgages Work?

Banks and mortgage lenders are all about assessing and minimizing their risks. They are less likely to lend money if they feel the risks are too high. Common risks lenders shy away from include:

• Limited credit history.
• Credit score challenges.
• Income.
• Debt-to-income ratio.
• Credit utilization ratio.
• New credit or recent credit applications.
• Irregular employment or limited time on the job.

While some of these things are not part of a traditional credit score, they are often used by lenders to help determine how attractive an applicant is as a borrower. Lenders want to reduce their risks whenever possible by extending credit to people they are confident will repay the loan.

Guarantors add an extra layer of confidence into the mix that helps borrowers appear more attractive to lenders. This means adult children may get approved for mortgage loans they would not qualify for based solely on the state of their credit, income, and work history.

This confidence is the difference-maker for many borrowers and can help young adults achieve their dreams of ownership much sooner than they would be able to on their own.

What is the Difference Between a Guarantor and a Cosigner?

Guarantors and cosigners are different entities altogether. While both can help adult children enjoy the privilege of homeownership some certain rights and responsibilities are different between the two.

For instance, cosigners are also co-owners of the home along with the adult child purchasing the home. A cosigner assumes an equal portion of the financial liability for the home. This means ensuring timely payments are made, insurance obligations are met, and other factors. Depending on the terms of the specific mortgage, some cosigners may own as little as one percent of the home while still assuming financial responsibility for the home if the adult child does not pay their debt. Cosigners do not qualify for some tax benefits unless certain conditions are met, so make sure you understand the legalities of doing so before filing taxes.

Mortgage guarantors are different for many reasons. First, guarantors do not have the same “rights” to the property as cosigners. Parents in the role of guarantors are only responsible if the adult child defaults on the loan and only after lenders have attempted all other means for collecting from the primary borrower. Another difference is this. In many cases, lenders will place the guarantor’s contribution into an interest-bearing savings account and then release the funds from the guarantor to the guarantor once the value of the mortgage decreases by approximately 80 percent, thus releasing the guarantor from their obligation.

Ultimately, a cosigner is a financial parachute for lenders willing to lend to riskier borrowers while the guarantor serves as a financial safety blanket. Both offer greater confidence in lending while one takes on far more responsibility in the process.

Can a Parent Be a Mortgage Guarantor?

Assuming parents meet the standard requirements for a mortgage guarantor they can, in most cases, serve in this capacity. Some lenders prefer to only allow spouses to stand as mortgage guarantors but there are plenty who will work with parents of adult children in this capacity. The criteria, though, can be problematic for some parents who are agreeable to assisting their children.

1. Parents must either own their property completely or have substantial equity in their homes. Each lender has its own criteria in this regard.
2. Parents must have sufficient income to cover the financial burden if they are called upon to do so. Lenders will want to verify their incomes in almost every situation before agreeing. Otherwise, parents must have sufficient savings to cover the financial obligation they are taking on.
3. Parents must have good credit scores to convince lenders they are acceptable risks and financially responsible people.

While some would say it’s as easy as one, two, three, it isn’t as simple as that. Acting as a mortgage guarantor is a huge responsibility for parents to agree to for their adult children. It should not be entered lightly as there are considerable risks to the parents, their assets, and their own retirement safety nets to keep in mind.

What Are the Risks to the Parents When Becoming Mortgage Guarantors?

The largest risks to parents when becoming mortgage guarantors for their adult children are financial in nature. Their credit scores are also at risk but the greater risk often comes in the form of lost assets should their children not meet their financial obligations and repay their mortgages as agreed.

Because these are not small risks to parents of adult children who may be approaching retirement or already retired and living on more limited incomes the risks are often more pronounced. It is certainly something adult children should keep in mind before asking their parents to serve as mortgage guarantors and something parents should consider before agreeing to serve in this capacity for adult children.

For parents who have absolute confidence in the ability and commitment of their adult children to make timely payments and stay on track when it comes to repaying their mortgage, this may feel like only the slightest risk to you. However, if you have concerns that your child may struggle, it may be in your best interest to establish clear guidelines before agreeing to act in this role on your child’s behalf.

Conversations for Parents to Have Before Agreeing to a Guarantor Mortgage

Before agreeing to serve as a guarantor for your adult child’s mortgage, parents need to have frank discussions about debt, income, and expectations. You may even consider asking for a copy of the receipt every time the mortgage is paid so you are certain the payments are made on time each month.

You should also make it clear that your adult child should approach you sooner, rather than later, if they anticipate trouble making their mortgage payments so you have the opportunity to contribute, if necessary, to help them stay current with their debt or negotiate with lenders to adjust the terms of the loan in some way.

It is a huge responsibility for parents to assume but one that most parents capable of doing so are happy to for the sake of an adult child. That being said, there do need to be honest conversations about what lies ahead and what it means for you, financially, as you are taking on major financial risks by acting as a guarantor for your child’s mortgage.

If you feel the need to do so, consider drawing up a contract with you and your child agreeing to certain terms and conditions to help you feel more confident and ensure that your child fully understands the risk you’re taking on by agreeing to be a mortgage guarantor on their behalf.

Are There Other Ways Parents Can Assist Adult Children Get Mortgages?

Before you get in too deep with the idea of serving as a mortgage guarantor for your child’s mortgage loan, there are other avenues you have available to you that can help your child get the mortgage loan he or she desires without requiring you to risk quite so much in the process. There are a few of the options you might want to consider.

• Gift your child cash for a down payment. If you have the cash on hand or in a savings account, you can gift them a deposit. While this won’t help all children get a mortgage loan, it can be a deciding factor for those who just need a slight nudge in the right direction for lenders to approve the loan.
• Purchase the home and then rent-to-own the home to your adult children. If you’re in a financial state to do so, this will give you greater control over whether payments are made on time and can help your child immensely.
• Consider purchasing a multi-family property, like a tri-plex or duplex, and renting to others to off-set the costs while providing adult children with a nice home of their own.
• Provide them a place to live while saving for the home they desire or building their credit.

The real key is to keep everything on an even keel and avoid going out too far on a limb for your child’s dream that you place your own retirement and security at risk to do so.

Understandably, parents want to offer their children the best of everything. That desire only increases as adult children begin building families of their own. However, there are things you can and do to aid your children in the home buying process that don’t have the same degree of risks. However, if you are confident of your child and have the means to do so without over-extending yourself to do so, becoming a mortgage guarantor may help your child achieve the dream of homeownership years before he or she could accomplish that goal on his or her own.