What Are the Rules on Being a Guarantor?
- A lender considers a guarantor's income first. He must have a sufficient salary to qualify. Generally, lenders require a guarantor to have a debt-to-income ratio no higher than 40 or 45 percent, including the new credit. An applicant and a guarantor might need to work for one employer or in the same industry for at least two years. Worker's compensation and unemployment benefits do not qualify as income, as they are temporary. Federal student loans and mortgage loans might have slightly different requirements.
- Credit requirements vary by lender and loan type. Lenders generally do not disclose credit score requirements. Every applicant's situation is different, and lenders offer loan terms based on the applicant's credit situation. Mortgages usually have stricter lending requirements and might have a minimum credit score requirement. Generally, a lender wants a guarantor to have a credit score of at least 600. A credit score below that indicates recent negative credit records, such as delinquent accounts, collections or bankruptcy. A credit score of more than 670 means an individual's credit accounts are in good standing.
- A guarantor should not have any recent negative information on his public record, such as a bankruptcy, collections, garnishments or tax liens. Derogatory public information lowers a credit score and remains on an individual's credit history for up to 10 years. A lender generally would not consider a guarantor who has unpaid collection accounts. If an applicant has had a bankruptcy but made an effort to re-establish her credit history, she might qualify as a guarantor. A creditor will be reluctant to accept a guarantor who has any unpaid obligations, such as a tax lien.
- Before signing a credit document, a guarantor should consider if he is able to repay the debt if a primary credit applicant defaults. Inability to repay the loan might have serious legal and financial consequences, such as a lawsuit and garnishment. Delinquent payments are damaging to a borrower and a guarantor's credit scores. A guarantor might request that a lender notifies him if a primary borrower misses a payment. If this happens, a guarantor can address the problem immediately, before the loan becomes seriously delinquent.
- A rental guarantor is an individual who guarantees a payment of rent by a rental property resident. If a resident breaches any terms of a rental contract, a guarantor can be liable for any damages and fees, including legal charges. An owner or a property manager might attempt to collect monthly rental payments from a guarantor if a resident defaults.