Family Guarantees

2011 April 18

In many cases, the amount of money that a borrower needs to spend each month on their mortgage is not the primary problem. Instead, it might be the size of the deposit that they would need to save up in order to avoid higher interest rates and the cost of lender’s insurance. The value of a home rises faster than the size of the average income. This means that it can take several years to save up a 20% deposit. By the time the deposit is saved up, many of the properties that were once affordable are now too expensive to apply for.
Thankfully, there is another option that does not require the borrower to pay lender’s insurance. This is known as a family guarantee. By relying on the support of your family, avoiding lenders insurance is possible without waiting years. As a matter of fact, a family guarantee makes it possible for you to invest in real estate as well.

How it Works

A family guarantee allows a member of you family to use the equity in their own home, or a property that they own, in order to provide security. In this way, you can borrow as much as 100% of the value of the home without having to worry about the extra expenses that you would normally be required to face under these circumstances.

For the process to work, a family member must agree to sign up as a guarantor for part of the value of the loan. In most cases this will be a parent, although a brother, sister, or grandparent certainly isn’t out of the question. They will then decide how much of the loan they will be willing to secure. They can use any amount other than 100%, although the most popular figure is 20%, since this often allows the borrower to avoid lenders insurance.

At this point, the borrower decides which kind of home loan they are interested in signing up for. They then fill out all of the necessary paperwork for the lender to evaluate the borrower’s financial situation. The guarantor will also be required to provide similar information, as well as proof that they are independent of the primary borrower legally and financially.

Benefits For the Primary Borrower
As the primary borrower, you will be able to buy a home sooner than you would otherwise be able to. You can avoid the years that it would normally take to save up for a deposit. You will be able to borrower a much larger amount than would otherwise be possible, possibly as much as the value of the entire home in addition to all the associated expenses. You can either reduce or eliminate the cost of lender’s insurance.

Advantages for the Family Member

As a family member to the primary borrower, the most obvious advantage is that you will be able to help them buy the home that they really want. It is also much safer for you then if you were to simply cosign the loan. Rather than being held responsible for the value of the entire loan, you are only held responsible for the portion that you have secured. You can also be released from the guarantee once the secured amount has been paid off by the primary borrower, or once the equity of the home has grown enough to cover this value.

Benefits to the Bank

You might not care why the bank benefits, but it can be helpful to understand why the family guarantee works in the first place. Banks purchase lenders to protect themselves from the threat of foreclosure. If the borrower’s situation changes and they can’t pay for the loan, the bank is forced to try to sell the home on their own in order to avoid losses. Of course, banks simply are not real estate agents, and can’t sell a home at the full value. A 20% deposit is usually enough to assure the bank that they will be able to avoid any losses if they need to sell the home on their own.

If the deposit isn’t large enough, the bank goes to a lender’s insurance company in order to protect themselves from these losses. Of course, paying for insurance would be a loss from the bank’s perspective, so they pass these costs onto the borrower.

When a family member puts up the equity in their own home against the value of the new home, the bank no longer has any reason to fear losses from foreclosure. The guarantor will be required to cover 20% of the value of the home, and the bank can rest assured that it will most likely break even or turn a profit.

Find out more about family guarantees.

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