Think about this: you’re trying to get a mortgage on a house. You’re shopping around for a loan and think you can settle down with a particular lender. Just when everything seems like it’s about to go ahead, you learn of something that feels like a punch in the gut: the lender requires a higher credit score than you currently have!
What can you do in such cases? In this article, I’ll share about a little something called a Guarantor Loan. I’ll also let you know why you should go for these loans.
To begin, let’s talk about what a guarantor loan is. A guarantor loan is one backed by someone else’s credit and ability to pay. It is essentially a mortgage with a co-signer, also called a guarantor. In this article, we’re going to explore four reasons you should consider getting a guarantor loan over a conventional mortgage.
You May Not Need a Deposit
Guarantor loans often allow you to secure a home loan without having to put down a deposit. This is one of the reasons why so many people with less than stellar credit and limited capital decide to go for these types of loans. In fact, you might even be eligible for a loan of up to 105% of the property value. A few lenders even extend it to 110%.
That extra amount covers conveyancing fees, property title transfer fees and stamp duty, but you may be able to use part of the money for repairing the property or paying off other debts. Note that the more you borrow, the more the monthly payment and potentially the interest rate because of the loan to value ratio, so don’t borrow more than you must to buy the property. If you want to evaluate what your monthly repayment value will be for your guarantor, there’s a useful tool that you can try out on the home page of https://www.trusttwo.co.uk/.
Your Credit Matters Much Less
By having a co-signer or guarantor, bad credit guarantor loans offer rates similar to that of someone with good credit. This is because the loan is backed up by a second party with better credit and able to pay the bills if you cannot. If your credit is mediocre and there is another co-signer with similar credit, you could still see low fees and interest rates.
Note that you can limit the guarantee of the co-signer so that you aren’t putting a relative’s home at risk if you cannot pay your loan. Conversely, if they are willing to guarantee their property, you’ll have a very low interest rate. Parents, for example, can guarantee a child’s home loan if they have sufficient equity in their own property.
Guarantors don’t have to be parents. They may be siblings, spouses, partners or adult children. For example, one partner can secure a mortgage in their own name with the second partner as a guarantor. The second partner is not equally responsible for the loan, and they may not be on the property title.
Most lenders require a family or marital relationship for someone to be your guarantor, so friends and colleagues are not considered for this financial and legal arrangement. Finding a guarantor may seem like a difficult task at first, but as long as you consider your options carefully it will be successful – often you will be provided with some rough guidelines by the loan company you are using, which you should utilise.
You Could Avoid Lenders Mortgage Insurance
Lenders mortgage insurance is insurance you pay to the mortgage lender in case you default on the loan to cover their costs of foreclosing on the property and the risk it is worth less than you owe on the home. This is why you have to pay LMI if you’re borrowing more than 80% of the property’s value. If you have a guarantor loan, you won’t need to pay an LMI premium. This expense alone could save you thousands of pounds.
Guarantor loans tend to be approved quickly because it is based on the credit of two separate individuals. They don’t have to scrutinise someone’s credit history or income as hard, and they don’t have to analyse someone’s bad credit and determine the risk because they have a backstop – the guarantor.
So there you have it.
If you have limited assets and you don’t have enough money to put down collateral, a guarantor loan allows you to borrow without a deposit. Also, your personal credit matters much less with a guarantor loan, and you’ll see lower fees or a lower interest rate or maybe even both. So, if you feel like a guarantor loan is the right choice for you, start enquiring lenders and find one that fits your needs.