Lenders approve loans for homes to buyers who have enough deposit to purchase properties. Sometimes, you may not have enough deposit, and the lender may doubt your ability to repay it. It is in such a case that you may need a guarantor loan for you to be able to buy a home.
A guarantor uses his individual property to cover a portion or the entire loan. They take responsibility to pay the loan if you as the buyer cannot repay it. Guarantor loans secure both the property in question and that owned by the guarantor. They come in different forms namely, security guarantee, family guarantee, limited guarantee, and income guarantee.
If you are purchasing a home for the first time but lack the required deposit, you can use security guarantee loan. The guarantor, in this case, is referred to as the equity guarantor. In this type, the guarantee uses their own property to secure your mortgage. The guarantor may also have a loan they may not have cleared for their property. The bank can take another mortgage as security. Both mortgages are supposed to be cleared as per the set terms and conditions.
A parent can also be your guarantor if you are a student looking to purchase the property. This form of guarantee is known as security and income guarantee. The lender of such a loan uses your parent’s property as security for your loan. Your parents must provide income details to the lender to show the potential of affording the loan.
When a guarantor covers only a portion of the loan, it is called a limited guarantee. It minimizes the potential liability of securing a loan on a guarantor’s property. If you choose this form of guarantee, you reduce the exposure of the guarantor to your home loan. When you are looking for a guarantor, you must get one with a stable income to impress your lender. They must also have a good credit score and be of age.
A guarantor loan allows you to borrow part or even the entire price of the property depending on your preference. Some lenders also lend more than the value of the property as long the property is guaranteed to help you cover additional costs such as construction or purchasing the raw materials to put up a building.
A guarantor loan has different benefits such as helping you acquire property without a deposit. It also exposes you to the property market faster and gives you the chance to get better loans by comparing different rates. It can also allow you to consolidate some debts like credit card. It can, however, put the guarantor at risk of losing their property if you are not able to repay the loan.
Insurance is not one of the qualifications for you to acquire a guarantor loan. It can, however, give you added protection if an unfortunate event prevents you from repaying the loan. You should, therefore, consider income protection or mortgage life insurance as you apply for a guarantor loan.