How to pick a guarantor?
There are a few boxes you have to check off throughout the apartment renting journey. After you’ve found that perfect apartment, let’s call it “the one,” your next step is to put in an application and hope that it’s approved, but what if it’s not?
For instance, if you’re a first time renter without credit or a longtime renter who lacks employment stability, you may not be approved instantly for a new apartment simply because you’re missing a few marks. But don’t worry – there are options if you don’t have enough financial proof to appease the property manager or landlord.
If you can’t get approved on your own for a lease, the property manager or landlord may suggest that you get a guarantor to sign the lease with you. But wait, what is a guarantor, and how can they help?
Qualifying for an apartment is a test in and of itself. In a landlord-driven market, where demand outweighs supply, many renters searching for their dream apartment have no doubt felt the pang of rejection. In most major cities, qualification standards are strict. Poor (or no) credit, little savings, or a questionable relationship with your previous landlord can hinder an apartment search. Fortunately, in the age of Fintech and innovative solutions, getting the apartment, you most desire isn’t necessarily unrealistic.
In many cases, a landlord may require a renter to provide more information or complete additional steps before approval. Often, this means finding a guarantor. We understand that navigating this can be stressful, so we’ve broken down everything you need to know about the process.
So, what is a guarantor?
A guarantor is a responsible party (which is a parent in most instances) that signs on to the lease and agrees to “take on,” or assume, the obligations set forth under the lease, most notably the payment of rent. This guarantee allows the landlord to sleep easy at night, knowing it has the protection of a credit-worthy third party without having to worry about renter insolvency. A guarantor is usually the additional piece needed to secure the apartment you desire.
Guarantor loans and mortgages are one way to help someone borrow money if they’re struggling to get approved by lenders – for example, this might be a young person with a limited credit history or someone with a bad credit history. There are risks involved for both borrower and guarantor, so you should enter a guarantor agreement armed with all the facts.
What does being a guarantor mean?
Being a guarantor involves helping someone else get credit, such as a loan or mortgage. Acting as a guarantor, you “guarantee” someone else’s loan or mortgage by promising to repay the debt if they can’t afford to. It’s wise only to agree to be a guarantor for someone you know well. Often, parents will act as guarantors for their children, to help them take that first step onto the property ladder.
Can anyone be a guarantor?
Almost anyone can be a guarantor. It’s often a parent, spouse (as long as you have separate bank accounts), sister, brother, uncle or aunt, friend, or even a grandparent. However, you should only be a guarantor for someone you trust and are willing and able to cover the repayments for.
To be a guarantor, you’ll need to be over 18 years old, with a good credit history and financial stability. If you’re a homeowner, this will add credibility to the application.
Whether you’re considering asking someone to be a guarantor, or you’ve been approached by a family member or friend in need, you need to be aware of the possible financial risks.
Obligations of a guarantor
Make sure you understand all your obligations by reading through the documents. Do take time to read and understand them, even if it takes a few days. Ask the lender to explain any terms and conditions you do not understand.
Principal debtor clauses
These clauses make you the guarantor liable as if you had borrowed the money yourself. So even though the borrower may escape liability, you would remain liable.
Payment on demand
The lender can seek repayment from you without having to prove it has attempted to recover the debt from the borrower. Payment must be made by you when the lender makes a demand. As a guarantor, you will be liable for further charges, legal costs and interest if payment is delayed. Be clear about how the lender may serve a demand. If you are not sure of the contents of the demand, approach the lender quickly.
Restructuring
The loan may be restructured at the lender’s discretion, but this does not release you from his obligations.
Continuing security
The guarantee secures all the borrower’s outstanding debts, as well as future advances to the borrower, subject to the overall limit of the guarantee plus interest, the lender’s charges and costs. You will be liable for this outstanding amount until the lender explicitly releases you from your obligations.
Subordination
You may be prevented from taking action against the borrower until the lender has recovered all amounts due to it from him first. The guarantor can only take action against the borrower after the lender has settled its position. You cannot protect yourself by taking security or collateral from the borrower that may prejudice the rights of the lender.
Concurrent remedies
The lender may take action against you to recover the loan without first having to take action against the borrower. The lender may also take action against you at the same time as any proceedings against the borrower.
Set off
The lender may deduct your monies if held in a savings account with it, to set off against any amount due under guarantee.
What are the qualification standards?
Qualification standards are simply the minimum requirements a renter must meet, usually set by the landlord or property manager, to get approved in a certain building. These differ tremendously from city to city and even from landlord to landlord. Each situation is unique and based on vacancy rates as well as the chance of default, depending on the landlord’s requirements.
Take Melbourne, for example. Most property managers require prospective renters to make 40x the rent in annual income. In the event a renter fails to meet that requirement, where are they to turn? The most common solution is to turn to a third-party guarantor. Guarantors in Melbourne are usually required to provide documentation evidencing their liquidity (usually 80x the rent) and willingness to step into the shoes of the renter upon default. If these requirements are met, business as usual. However, there may be a number of reasons why someone may not agree to act as a third party guarantor (not enough liquid assets, not willing to take on that risk, not willing to sign a lengthy contract). This can significantly hinder the application process. In addition to these looming obstacles, the recent changes in rent reform (if you haven’t heard about rent reform, we break it down here) have stifled the residential real estate market and made life extremely difficult for property managers across the state. Where landlords used to have the ability to accept multiple months of rent as security, or even prepaid upfront, this option no longer remains.
Understanding the Role of a Guarantor
A guarantor is typically over the age of 18 and resides in the country where the payment agreement occurs. Guarantors generally exhibit exemplary credit histories and sufficient income to cover the loan payments if and when the borrower defaults. At this time, the guarantor’s assets may be seized by the lender. And if the borrower chronically makes payments late, the guarantor may be on the hook for additional interest owed or penalty costs.
Guarantors as Certifiers
In addition to pledging their assets as collateral against loans, guarantors may also help individuals land jobs and secure passport documents. In these situations, guarantors certify that they know the applicants and corroborate their identities by confirming photo IDs.
Limited Versus Unlimited
As defined under the terms of the loan agreement, a guarantor can either be limited or unlimited, with respect to timetables and levels of financial involvement. Case in point: a limited guarantor may be asked to guarantee a loan only up to a certain time, after which the borrower alone assumes responsibility for the remaining payments and alone suffers the consequences of defaulting. A limited guarantor may also only be responsible for backing a certain percentage of the loan. This differs from unlimited guarantors, who are liable for the entire amount of the loan throughout the entire duration of the contract.
Other Contexts for Guarantors
Borrowers don’t solely use guarantors with a poor credit history. Pointedly: landlords frequently require first-time property renters to provide lease guarantors. This commonly occurs with college students whose parents assume the role of the guarantor, in case the tenant is unable to make the rent or prematurely breaks the lease agreement.
Guarantors Versus Co-Signers
A guarantor differs from a co-signer, who co-owns the asset, and whose name appears on titles. Co-signer arrangements typically occur when the borrower’s qualifying income is less than the figure stipulated in the lender’s requirement. This differs from guarantors, who step in only when borrowers have sufficient income but are thwarted by lousy credit histories. Co-signers share ownership of an asset, while guarantors have no claim to the asset purchased by the borrower.
However, in the event the borrower has a claim against a 3rd party that has caused the default, the guarantor has the right to invoke a process called “subrogation” (“step into the shoes of the borrower”) in order to recover damages.
How to find a guarantor?
A relatively standard way of getting a guarantor is to ask your parents. It may not be the ideal situation for you, but it’s the most common scenario for newer renters in search of a guarantor. Close friends or family members are also good options, but you have to be sure that you’re comfortable asking this person to take financial responsibility for your rent if you default on payment. That’s a lot to ask, so be sure you’re prepared before you ask this financially focused favour of someone.
Though parents are the most likely option, it’s still a good idea to state your case to your potential guarantor as to why they can trust that you will not default on payment. You need a guarantor in this situation simply as a backup for the property manager or landlord to assure them that they will get that rent payment one way or another. But that doesn’t mean that you will default in paying your rent – so prove that to your parents, family member, friend – whoever it may be.
If you don’t have someone close to you who is willing to cosign with you, then you can pay a guarantor service to sign with you instead. However, you’ll have to pay additional fees for this service. Typically, the tenant will pay the guarantor service anywhere from 4% to 10% of the annual rent for their services. If your rent is AU$2,000 a month for a 12-month lease with a 6% rate, then you’ll be responsible for one payment of AU$1,440 (typically upfront before the lease signing). But if you’re uneasy about having to pay for a guarantor, then a guarantor service probably isn’t your best bet.
Your potential guarantor needs to be financially stable, responsible, and trustworthy (while also having great credit). If you know of someone like this who you have a strong relationship with, then it’s in your best interest to ask that person. They’ll also have to sign the paperwork, submit proof of income, and comply with other requirements. Just be sure that you are willing to be as stable, responsible, and trustworthy in your promise to your guarantor that you will always pay your rent on time (so they don’t have to pick up the slack).
Alternatives To Getting A Guarantor
You may find yourself in a situation where you have no personal options for a guarantor, and you don’t feel comfortable using a guarantor service. If this sounds familiar, then you have another option (depending on the property manager or landlord, of course)! Typically, the property manager or landlord will accept additional payment (along with your move-in fees) as a form of assurance or proof that you’re a reliable tenant. This payment could be in the form of a higher security deposit or a few months’ rent in advance.
Some property managers and landlords are more willing to work with you than others. It depends on the management, the cost of rent, and how your application review goes. If your credit score is okay and your rental history is open for discussion, then it’s more likely that you won’t have to get a guarantor. You should always make sure that you can afford to rent the apartment you are applying for, but if you don’t meet the requirements (such as good credit) in order to rent the apartment, then getting a guarantor is a great option! Best of luck, my fellow renters.
Before you agree: What to look out for
Before you agree to become a guarantor, think carefully about the following:
Can you afford and are you willing to repay someone’s debt?
Ask yourself if you can afford to and if you are willing to pay off someone else’s debt. If the person is unable to repay the debt to his lender, he is likely to face the same difficulty repaying you. Once you repay his debt, you may not be able to recover the money from him.
Is the borrower able to repay the debt?
Consider seriously why he needs to borrow, why he needs a guarantor and how he is going to pay off his borrowings. If the loan is to be repaid over a long period, make sure you are comfortable that he will have enough income over this time to repay his debt.
Check the following:
- Ask the borrower for all his loan documentation so you can assess the loan. Ask him to provide a copy of his credit report. This will help you to verify his overall financial standing.
- Find out if any other security has been given for the loan, such as a mortgage, or if the borrower has pledged a deposit. The monies deposited with the bank can be set off against and deducted from the amount owed on loan. Additional security may lower the risk to you as a guarantor.
- Suppose you are going to be a guarantor for someone’s business loan. In that case, you need to assess if the business will be sustainable and produce sufficient income to pay its overheads (e.g. rental, staff, utilities and suppliers) as well as repay its debts.
What is your liability?
The lender may ask you to repay a debt as soon as the borrower misses an interest or principal repayment. Ask the lender:
- How much you will be liable for and the circumstances where the lender will ask you to repay the debt.
- Suppose your liability is limited to a specific amount or is unlimited. Find out when your liability as a guarantor will be discharged and how you will be notified.
What are the rights and obligations of co-guarantors?
If you have agreed to a “joint and several liability” arrangement, the lender can ask you alone to pay all amounts owing to it, even if there are other guarantors. You may have rights against, as well as obligations to, your fellow guarantors. You may be able to persuade your fellow guarantors to contribute to the settlement of the loan even if the lender is unwilling to pursue them. On the other hand, you may become liable to your fellow guarantors.
If someone has asked you to be a guarantor for them, it’s a good idea to encourage them to compare options with different lenders to make sure they’re getting a good deal. If you end up having to cover the repayments, you want to make sure it does not cost you more than it could have.
