Understanding Family Guarantor Loans

It is the natural instinct of most families to help each other out. However, when you are a parent wanting to help your child into their first home for example, you may be met with a stubborn desire on the part of your off spring to make it on their own. However, there is a happy medium between giving your child the money they need for their home or deposit, and ignoring their struggle to save all together, and that is to go guarantor on their home loan.
What is a family guarantor loan?

                              

A guarantor loan allows people with a poor credit rating, little deposit or who are seen as a risk to lenders in other ways, the chance to be approved for a home loan. All you need to do is find an eligible guarantor to endorse your loan application to be approved. Your lender won't conduct a credit check so you can still be approved if you have high credit card debt or have defaulted on other loan payments.

To get a guarantor loan:

• Find a guarantor. As the borrower you need to find someone who is confident in your ability to repay your home loan, such as your parents. Your guarantor uses their own credit to help you get your loan. a guarantor doesn't have to be a family member, they can be a friend, as long as they meet the lender's criteria. A lender will usually require a guarantor t be a home owner, over 23 years old and have a good credit rating.
• Complete application forms. You then provide the details of your loan and your guarantor to the lender and you will then both need to complete application forms. The lender may then contact your guarantor to confirm their details and make sure they are aware of their obligations.
• Checks on the guarantor. The lender will then complete a credit check and assess the guarantor’s other eligibility criteria.
• Interest rate. A family guarantor loan is an unsecured loan but you are not necessarily looking at a high interest rate because of this, instead the interest rate is based on the credit history of the guarantor.
• Loan approval. If the checks on the guarantor are successful, the loan will be issued to the borrower and the guarantor’s role is over. The monthly repayments are their paid from or directly debited from the borrower’s account.
• Guarantor's role. The guarantor of the loan will only need to step in again if the borrower can't make their repayments, in which case the guarantor needs to cover the amount.
• Borrower's credit rating. If you are able to make your repayments on time throughout the loan period and repay your loan responsibly without needing to cal on your guarantor, this will improve your credit profile.

The guarantor and their role

A guarantor is taking on a big responsibility, and should understand their role fully before agreeing. At the same time, if the borrower has a bad credit rating, they are able to improve it by using the good credit rating of their guarantor. However, the guarantor is still taking a significant risk because they become liable for the loan repayments if the borrower can't make their repayments, this is why family guarantor loans are the most common.

The role of the guarantor includes:

• Trust. When your guarantor is trusted and financially secure, and they put their trust in you, then you can increase the trust instilled in you by the lender.
• The initial assessment. Because a family guarantor loan approval is based on the eligibility of the guarantor and not the borrower, your guarantor will need to be assessed during the approvals process.
• Repaying the loan. If the borrower cannot or will not make their loan repayments, the guarantor must make those payments to avoid legal action from the lender.
• Liable for the loan. the guarantor is also liable for any outstanding loan costs and if the loan is not repaid it affects the credit rating of the guarantor, not the borrower.

To be a guarantor you must:

• Be a home owner.
• Have a good credit history.
• Be employed in a full time position.
• Be over the age of 21, although this age limit can vary between lenders.

As a result, a guarantor can be:

• A family member.
• A neighbour.
• A colleague.
• A friend or anyone else who has a clean credit history and is willing to be responsible for your loan.

Advantages of a Family Guarantor Loan

While your guarantor is taking is risk in supporting you in your loan application, as a borrower who is unable to secure a loan in the normal way, you can benefit from a family guarantor loan in the following ways:

• Easier loan application. If you don't have enough deposit, if you have a bad credit rating, if you are self employed or if you are borrowing for your first home and so you have no credit experience, then using the experience and security of a family guarantor can help you get your loan approved.
• Your credit isn't checked. The application process for a family guarantor loan doesn't require you to meet any eligibility criteria or undergo any credit checks. Instead, the loan is approved based on your guarantor's credit. Even when you are assessed for a loan in the normal way, there is no way a lender can know everything about how you live and manage your money. However, your family guarantor does know these things, and the fact that your guarantor is willing to put their trust in you encourages the lender to put their trust in you too.
• Lower interest rate. When you apply for a loan based on the credit history and application of your guarantor then they are presenting as a good risk and this qualifies your loan for a low interest rate.

Disadvantages of a Family Guarantor Loan

The disadvantages of a family guarantor loan fall to the guarantor because they are risking having to repay the loan amount if the borrower is unable to do so. The guarantor is putting themselves and their own home up as security for the loan and if the borrower can't meet the repayments the guarantor must repay the loan, as well as pay any closing costs to sell the house and pay out the loan.

Therefore, the guarantor should carefully consider the borrower asking to guarantee their loan, and decide whether the lender is justified in viewing them as a risk. This should also be a chance for the borrower to look at why they can't be approved in the normal way, and can you really afford the mortgage repayments, or will you end up putting pressure on your guarantor?

Who is suited to a family guarantor loan?

A family guarantor loan is a great alternative t a loan rejection, but it still isn't for everyone. A guarantor loan is best suited to:

• People looking to restore their credit rating.
• People who can afford the loan repayments without having to rely on their guarantor.
• People who are renting and want to make the move to owning their own home.
• Homeowners who don't have equity in their property and want to refinance.
• First home buyers who are still living at home and want to move out and start their own life.

This article was written by William from Home Loan Finder. Visit Home Loan Finder to compare home loan interest rates or find the right mortgage broker.