It’s no secret that housing and rent prices continue to rise. In 2018, the national median cost to rent a one-bedroom apartment was $1,025, and two-bedroom apartments were at $1,255. For high-cost-of-living areas, these numbers can be twice as high. Think New York City, where prospective tenants are typically required to earn 40 times their annual rent. Given those financial constraints, the question of guarantor vs cosigner comes up a lot.
Sure, the median monthly mortgage payment of $1,030 for a 30-year mortgage seems reasonable, but don’t forget you’ll need to pay taxes, maintenance fees and any necessary repairs.
In other words, affording a place to live in might be harder than ever. All hope isn’t lost, though. You may be able to get some help—by asking for a co-signer or guarantor.
Both of these involve another person strengthening your application to increase your chances of approval. Even still, they’re relevant in different situations. Here’s what you need to know about the difference between a guarantor versus a co-signer.
Guarantor vs cosigner—is there a difference?
Both guarantor and co-signers are people who can help bear financial responsibility. A co-signer is someone who is considered an equal party on a loan or lease but doesn’t necessarily plan on living with the applicant—though in the instance of roommates, they may. A guarantor, on the other hand, acts as a backup in case the borrower or tenant doesn’t pay—they’ll take on the responsibility of the loan or lease.
Scott Smith, founder and CEO of Royal Legal Solutions, which assists real estate investors, says that a co-signer is directly liable for a loan or lease.
“Both the co-signer and borrower are equally liable, and lenders or landlords can go after the co-signer directly in case of default or nonpayment,” he said. “The guarantor is only liable if the original signer breaches.”
What is a co-signer?
A co-signer typically is the one who helps the primary borrower or tenant secure a loan because they may not have a strong financial profile to do so on their own.
“A co-signer’s obligations are the same as if they were another tenant or borrower,” said Elizabeth Whitman, managing member of Whitman Legal Solutions, where one of their specialties is real estate law.
In other words, you can think of a co-signer as the same as the primary borrower. For someone looking to rent, a landlord needs to know that a tenant has the ability and willingness to pay the rent throughout the rental agreement. That means if the main tenant cannot prove their income—like a college student who may not be working—then someone else (for instance, a parent) also needs to sign. Or, someone might need an additional roommate to afford the rent in the first place.
In terms of the rental agreement, a co-signer is technically another tenant, with the landlord granting the same rights to occupy the rented space—think a partner or roommate. Both need to pay rent. This is why it’s vitally important to know the person co-signing your lease, and why running an online people search on potential roommates is always a good idea.
In terms of a home loan, both the primary borrower and co-signer have equal rights to the home purchase—think a married couple buying a home together. The lender will treat each applicant the same by looking at both partners' credit reports, financial statements and other relevant information to underwrite the loan. Perhaps a couple needs both incomes in order to strengthen their application, particularly their debt-to-income ratio. This number looks at whether applicants can afford to take on more debt.
The risk of being a co-signer is that you’re equally responsible for the lease or loan even if the other borrower doesn’t make any payments. Whether or not you’ll be living there, you’ll need to make sure payments are made on time. Otherwise, it could negatively affect your credit.
What is a guarantor?
Unlike a co-signer, a guarantor is only liable for payment if the primary borrower or tenant isn’t able to pay. Think of this person as a backup or a last resort. For example, a business might take out a loan as the primary borrower and the business owner is the guarantor, who will take over the payments if the business goes bankrupt.
This also means the guarantor doesn’t have the same rights as the primary borrower or tenant. Whitman says any payment activity isn’t typically reported on the guarantor’s credit report.
“It is less likely for a guarantee [or the loan/lease] to show up on the guarantor’s credit report unless the guarantor defaults,” she said.
It also means that the guarantor doesn’t have the right to live in a rented or purchased property. In other words, they’re assuming financial risk without the legal protections a co-signer would have.
For example, let’s say the tenant accidentally starts a fire on their balcony and causes $250,000 in damage, and renters insurance only covers $100,000. If you signed on as a guarantor, then you could be legally obligated to pay the remaining $150,000 if the tenant can’t.
For a mortgage, the guarantor is there in case the borrower defaults on the loan—perhaps the primary borrower has enough income but doesn’t have a great credit profile. The bank will then require a guarantor.
Although the risks may not seem as high as being a co-signer, you could be out thousands of dollars or more if the primary borrower defaults on payments. If you fail to resolve the problem, your credit could be negatively impacted.
I get by with a little help from my friends (or parents)
Asking to be a guarantor or co-signer shouldn’t be a decision to be taken lightly. After all, as a co-signer, you’re equally responsible for the rent or loan. If your roommate or child cannot pay the rent, you’ll need to pick up the slack or risk financial consequences. Same goes for being a guarantor, even if you’ll only be contacted as a last resort.
Knowing potential risks ahead of time means you can make an educated decision to move ahead with the arrangement. That also means reading the fine print so everyone involved will benefit.