How To Find A Guarantor?....

Discussion in 'Property Finance' started by MCS_80, 6th Aug, 2008.

  1. MCS_80

    MCS_80 Member

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    Hi Everyone,

    I am posting this thread to help a friend out with a dilemma she now has.

    She is married with One kid and the lucky couple would like to buy their first home

    She works part time earning about $400 a week and He earns about $800 a week Net.

    They have found the area they want to buy in but can not get a Mortgage without a guarantor. Her parents and His parents do not want to go guarantor because "What if you get divorced?". The young couple are very happy and have a bright future.

    The questions she would like to know the answers to are :

    1. Can a guarantor be found other than family and friends?

    2. If a guarantor can not be found, is a bigger deposit needed?

    3. What are the pros and cons of BEING a guarantor?

    4. Any other help or advice appreciated....


    Thanks for taking the time to read this thread.

    Cheers

    Mick
     
  2. Raddles

    Raddles Member

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    Hi there
    I can understand why the parents would not wish to be a guarantor. If you become one - you have to be prepared to step into the debtor's shoes and take over the liability.
    One of the big cons of being a guarantor involves the extent of liability. If the guarantee is unlimited, the borrower could be involved in all sorts of arrangements and the guarantor would have to foot the bill if there was a problem.
    If there has to be a guarantee, it should be limited to an amount and the terms should be quite restricted.
    Can your friends find out if there are other options to providing a guarantee?
    thanks
     
  3. marg4000

    marg4000 Member

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    The lender requires a guarantor because they are not convinced the couple can repay the debt for the amount borrowed.

    Usually required with a low deposit, but the best bet is to ask the lender what is necessary for a loan with no guarantor required.
    Marg
     
  4. MCS_80

    MCS_80 Member

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    Thanks for the replies everyone :)

    The bank in question said this to the young couple.

    "We will lend you 220k with a 10% deposit, or if you have a garauntor, we will lend you 280K with NO DEPOSIT"....

    At this point in time, the couple have no money saved.

    What if someone who is independant and not a family member wants to go garauntor? Can that be done, or do banks prefer family members?
     
  5. Rolf Latham

    Rolf Latham Member

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    Hiya MC

    Wrong approach in my view, big time.

    Find a lender that will do what they want to on their own terms.

    Getting a 3rd party involved is possible, sometimes even an unrelated party, but doesnt look good when these guys have zip savings at this point. There may be reasons for this of course

    ta
    rolf
     
  6. Rob S

    Rob S Member

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    Will probably be hard to find a guarantor who doesn't know the couple really well (i.e. a close family member or friend). An alternative is they can borrow a smaller amount from someone under a private arrangement.

    E.g. they borrow $60K from a friend/associate/fairy godmother.
    Then they have a deposit to take to the bank and borrow more money without a guarantor.

    At least this way the person helping out is not taking on the risk for the full loan - only the $60k that they lend them.

    My wife and I did this for my brother-in-law and his wife when they bought their first home. We did a redraw on our mortgage and asked him to pay us back at our mortgage rate so we weren't out of pocket. They got divorced soon after - luckily the house gained enough value in the meantime and they had the cash to pay us back. In hindsight I wouldn't do it again - big money has the potential to wreck families. My wife's brother is a nice guy, but really hopeless with relationships and (now I know) with money.

    Since they have no deposit it means they have no history of making regular payments into an asset. This is a bad sign. Let them save for a year at least, get used to socking money away. Then you'll see if they're in a position to get a loan. They might be nice people with a bright future, but that is in no way correlated with the way they handle money.

    Remember, if you're the guarantor you're taking on ALL the risk. So do your due diligence just like any other financial risk you take. I've seen too many families damaged by guarantor arrangements that didn't actually anticipate what might happen if that guarantor provision was actually called up one day.
     
  7. MCS_80

    MCS_80 Member

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    Thanks for the replies everyone.

    I have no intention of being garantor myself.

    Just ideas to help this couple become happy home owners.

    Although, id like to work out a way to be garantor one day and be fully protected. Charge a once off fee of say $2,000 and if the house goes belly up, its sold and the bank gets their money and I walk away with 2k.

    Ideas, ideas...:)

    Cheers

    mick
     
  8. asdf

    asdf Member

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    Just like selling a put option for $2k in return for a $280k loan? You'll find you'll be bid out the ball park if offering those terms.
     
  9. Sunder

    Sunder Member

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    The question is, what if the house goes belly up, but:

    1. As a 100% loan, the value of the house started below loan value
    2. As most capital cities are in decline, the value of the house falls to far less than the loan
    3. During long foreclosure procedures, large interest accrues
    4. During long foreclosure procedures, legal fees are added to the bill.

    So you guarantee a 280k loan for $2k profit... And the bank comes after you for 350k? Legally you'd be bound to pay it. What is the payout? 1:70? You'd want to be taking odds of less than 1% chance of default, to take that payout. ANd if the chance of default is so low, why does the bank want a guarantor?

    Basically, when the bank is asking for a guarantor, they're saying not only will we not take this risk - but our mortgage insurer will not take this risk. So here are two companies with great risk analysts and great actuaries saying the risk isn't worth it... And you want to take the risk for a mere $2k?

    Betting against the bank is like betting against the casino. Sure you might win the occasional hand, but in the long run, the odds are stacked against you.
     
  10. Piston Broke

    Piston Broke Banned

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    Huh??? And you come here looking for someone else to pickup the responsibility? :rolleyes:

    Maybe they can take responsibility for themselves, work a little, save a little and have their 10% deposit.
     
  11. Perp

    Perp Member

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    Mick, it's good that you want to help your friends, but I suggest you limit your involvement to advice, contacts, etc, but don't get financially involved! When you go guarantor for somebody, you have to declare the loan when you apply for finance, even though the person whose loan it is may be meeting all payments. It affects your servicability. It's an all-round bad idea to be guarantor, other than for an entity from which you'll profit (eg your Trust).

    But as Rolf said, the way to go is to shop around and find a lender who will lend them what they need without a guarantor. If they're not using a mortgage broker, that should be their first port of call. Most of the loans we've taken out the past decade haven't been available to the retail market, ie can only be obtained through brokers.

    And as Rob S has suggested, borrowing the deposit could also be an option. That's far less risky to the altruistic friend or family member than going guarantor for the whole loan.

    I hope your friends are able to enter the market - with all this D&G, it's becoming a good time to buy, IMHO, as long as they stay put at least 5-10 years.

    Incidentally, as most young people don't have a planning horizon that is that long :D, remind them to buy a house that'll suit them for their lifestyle in 10-20 years' time. If finances allow them to upgrade or move anyway, then great, but if things turn bad and you have to stay put, you want to make sure it's at least marginally suitable. The trendy apartment that they may love to rent may not be a good property to buy, because when they have two kids and a dog and want to be walking distance to schools, it won't suit them. And it's much more expensive to move house when you own, than it is to move when you rent. So when buying, you have to think whether the property meets your longer term needs, not just today.
     
  12. GoAnna!

    GoAnna! Member

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    I think they need to start creating their own future. I think to give them an easy way out at this stage would not be bringing them a gift. Does what they want to buy cost more than their rent per week? If it costs more than their rent and they think they can afford it why are they not saving right now?

    They need to start by putting $1 in the bank. Then another. 10% a week is $5K a year. Maybe they need another part time job to add to that or focus on getting better paid jobs.

    I think information that helps them understand debts reduction, daving and investing might be the best way to go. That is if they are asking you for advice. In most places in Australia time is on their side. Most area won't see large price increases over the next year. (according to my crystal ball)
     
  13. Bradsdad

    Bradsdad Mortgage Broker

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    It sounds like your friend/s have no funds at all and the lender is refering to lending the total funds including costs. As such they would require additional security. Obtainin g a 3rd party to do this would be a big ask considering the risk hence why the majority of lenders require it to be from parents or immediate family members. They consider the fact that most parents would leave their property to their brood.
    Have your friends considered borrwing the money required from parents/another source? For a purchase price of $270k they would be around $23k short ($13k if FHOG is available). It would appear on the surface (you haven't mentioned they have kids or any other debts) that they could both service a loan of say $270k and still have some room to repay the other debt.




    Regards
    Steve
     
  14. Twitch

    Twitch Member

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    Banks love selling money, they offer credit cards to pets and dead people. So if a bank is asking for a guarantor on a loan that means even they don't believe the couple can afford the loan.

    As I said in another thread, broke people should not be buying houses as soon afterwards Murphy will move in and bring his friends Desperate and Stupid with him.

    My advice is for the couple to buy a house when they can 'afford it', and that IMHO means at least a 10% deposit plus closing costs in cash savings.

    cheers. :)
     
  15. MCS_80

    MCS_80 Member

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    Thanks for the feedback everyone.

    Im no money expert, this is why I come here for opinions and ideas. Cheers:)


    And to respond to your comment Piston Broke. This couple DO take responsibility for themself. They WANT to buy their own home to get on with life and buy more property after that. They are playing by the rules and are looking at every option.

    I did not come to Somersoft to ask members to become garantor at all. I came here for advice and I got it.

    Cheers

    Mick
     
  16. Perp

    Perp Member

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    Of course there's some validity to your point, but I would highlight that banks are a lot more conservative today than they were 6 or 12 months ago.
     
  17. Bradsdad

    Bradsdad Mortgage Broker

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    Sorry Twitch but I must disagree. Banks may ask for a guarantee when 3rd party security is involved without the guarantor being used for servicing. In fact this is far more common that a guarantor being requested for servicing. Most lenders will firstly ensure the security is acceptable and within their credit criteria THEN look at the ability to repay. The servicing on the loan is usually based on the clients own ability.
    With the limited figures available for this scenario it would appear that the couple have adequate income to service the loan. I'm not saying that this is the situation but it's possible that the couple maybe starting over again in a second relationship. I've dealt with such clients and it's damn tough starting over again with nothing. They may have even contributed all their savings towards a wedding/honeymoon/travel or been long term renters (lining someone elses pockets) where loan repayments are well under current rental payments.
    Saying a 10% deposit + costs is very broad advice. Even for young 1st home buyers this would mean saving probably a minimum of $25k to $30k. A big ask when paying rent.


    Anyway just my 2 bobs worth with no intent to be arguementative. Opinions are a great thing and can broaden ones knowledge :)


    Regards
    Steve


    PS ...is there a spellchecker on here and if so how do I use is. I'm sure there are some blunders as my 2 fingers get excited sometimes when they typed and think they can do 100+ words a minute :D
     
  18. MCS_80

    MCS_80 Member

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    Im not sure if there is a spell check on here Steve.

    A little trick I use when my post becomes long, copy and paste your draft post into a word document and do a spell check there, then copy and paste that back into here and your all checked.

    Cheers

    Mick