Becoming a guarantor for a friend or relative can endanger your most precious assets. Consider the following story:
In 2004, a young girl wanted to purchase a piece of property and build her dream home. She asked her mother to sign as guarantor for a loan in the amount of $380K and her mother agreed. The bank did not advise the mother to seek legal counsel or financial advice, and the mother signed the guarantee. The daughter purchased some land for $150K and saved the remaining money (supposedly) to build her home.
Later that year, it came to the mother’s attention that her daughter was using the loan money for purposes other than home construction. The mother made a trip to the bank to discuss the matter. The loan was not being used the way it was supposed to be and she did not want her daughter to draw on the loan for anything other than building her house. The bank assured the mother that any further drawings would require a receipt.
Shortly after this conversation at the bank, the mother called to make sure that everything was okay with regard to the loan. The bank informed her that they could not tell her anything about the loan for privacy reasons and that she would need to discuss the matter with her daughter directly. Her daughter told her that everything was fine, so the mother put the issue to rest.
In June of 2009, the mother received a notice from the bank informing her that her daughter had defaulted on the loan and that $4000 was owed. The mother immediately called the bank and was told that $380K was now owed on the loan. She also learned that her daughter had been taking money out over and over again without any receipts. The bank further informed her that this type of loan did not require her daughter to produce receipts. None of the money borrowed was used for home construction.
This bank should never have agreed to allow the mother to sign as guarantor. She did not understand the process, and yet they never advised her to seek counsel from a professional. In addition, when the mother had initially complained to the bank about the way her daughter was using the loan, they never told her that the loan did not require receipts. In fact, they assured her of exactly the opposite. The bank had essentially given a young girl a $380K credit card in her mother’s name.
At this point in time, the mother and daughter are no longer behind in paying off the home loan. However, the daughter will never be able to pay the loan off fully until she is well past retirement age. In addition, the health of the mother has been affected, and, as can be expected, so has her relationship with her daughter.
What is the Answer?
This story is very frightening indeed. Most all banks will ask anyone wishing to act as guarantor to obtain legal or financial advice prior to allowing them to sign the paperwork for liability reasons. In this case, since the bank did not do this, they may be subject to legal action.
In order to rectify the situation, the mother should first call the bank and request copies of all the documents associated with the account including the loan application, signed guarantee, and final loan document. Next, the mother needs to educate herself about the Credit Ombudsman guidelines, as well as call them to talk about the situation. The mother would then need to visit the bank with her complaint about their negligence and let them know that she plans to take further action if they don’t help her. Finally, the mother would have to seek legal action if the bank refuses to cooperate.
It is made clear in this tale that the mother has suffered from this arrangement. Her health, her relationships, and her credit have all been affected. However, because the situation has not yet caused the mother direct financial loss, a court may be reluctant to offer sympathy. In fact, she may need to reach the point of direct financial loss before she will be able to successfully battle the bank in court.
As anyone can see from this situation, becoming a guarantor is no simple decision. Signing a guarantee makes you personally responsible for the debt or mortgages in question in the event that your friend or relative is not able to pay. If the payments are passed to you and you can’t afford them, your assets are up for grabs. Before you become a guarantor for anyone, it is essential that you seek financial and/or legal advice to ensure that you are well-educated about the process. In addition, you need to make sure that you have the funds to pay off the loan should you have to. Finally, don’t sign any forms until you are certain that you agree with all of the conditions they impose.
More information about guarantor loans.
There are many mortgage lenders, banks and brokers that now offer low documentation mortgage loans to people who are self-employed, independent contractors or simply prefer the privacy of not declaring their income. Borrowers who are self-employed often having trouble securing a traditional mortgage home loan because they do not have formal income verification. A Low Doc mortgage loan offers those borrowers the flexibility of a stated income or Low Doc mortgage loan based only on a self-declaration of income, along with a credit report and a twenty percent down payment on the property.
If you are applying for a Low Doc mortgage loan, it is important to remember that although you can have bad credit, you most likely will need to have a clean track record for the past twelve months. In other words, it would be best to keep your credit report in good shape for at least twelve months before you apply for a Low Doc home loan. There are also some additional considerations. For example, most Low Doc loans are capped at eighty percent of the appraisal value of the property, for a maximum loan amount of 1.5 million dollars, and Low Doc Loans are often more expensive than traditional full documentation mortgage loans due to the higher credit risk profile.
Even with these limitations, Low Doc or No Doc loans are very useful for borrowers who do not have formal income verification documentation. Borrowers who are independent contractors or self-employed often fit this profile, because they do not have W’2s or tax returns to verify their income. Low doc loans allow banks and mortgage brokers to extend credit to borrowers who have a good credit history, at least for the previous twelve months, without requiring proof of income. Remember that your credit history over the last twelve months is weighed the most heavily, as opposed to your entire credit history.
Acquiring a Low Doc mortgage loan may be the first step to rebuilding a great credit profile. Many people with credit problems find that a home loan, with less stringent guidelines than a traditional mortgage loan, will help them to repair their financial situation and get them back on their feet. In order to qualify for a Low Doc home loan, you may need to first obtain a personal debt consolidation loan to roll your monthly payments together, thereby lowering your overall monthly debt load. A debt consolidation loan for people with bad credit may even keep you out of bankruptcy, while you are working on qualifying for a Low Doc mortgage loan.
Low Doc Home Loans are usually more expensive than traditional home loans due to the higher credit risk profile. These types of mortgage loans are mainly geared for customers who want to purchase a residential house, refinance an existing home or buy an investment property. This is one of the easiest mortgage loans to apply for and is quite fast in the underwriting process due to the limited documentation requirement. As the borrower, you would only need to sign a statement certifying your income. You will also need at least a 20% down payment and a decent, although not perfect, credit rating. Additionally, before applying for a Low Doc loan make sure that there are no delinquencies on your credit report over the last twelve months.
After twelve months of timely mortgage payments, you can apply to roll your loan over to a fixed rate. In order to do this, you must provide proof of your stated income from you initial mortgage documentation. Usually this proof comes in the form of tax returns. The income documentation must at least match the stated income on your original loan documents. If you have a variable rate mortgage, it is important to roll your home loan over from a variable rate to a low, fixed rate, so that you don’t get over your head if the interest rates rise expectantly.
A Low Doc mortgage loan is a relatively quick and easy process to securing home financing. It is very important before you apply for a Low Doc loan to make sure that you have a substantial down payment of twenty percent plus closing costs, as well as a clean credit report for the last twelve months. Low Doc or state income documentation loans are wonderful financial products for borrowers who do not have formal verification of their income. They are also great financial instruments for re-establishing a good credit profile.
If you have bad credit and are self-employed, do not lose hope! With some diligent effort and savings, you will be able to secure a Low Doc mortgage loan from a financial institution, mortgage broker or bank. If you have bad credit or a very high debt ratio, your first step may be to secure a personal debt consolidation loan. A debt consolidation loan will help you to repair your credit rating and lower your overall monthly debt load. With this advantage, you will be in much better shape to qualify for a Low Doc mortgage loan.
What are we talking about when we use the phrase “60% LVR lo doc loan?” There is plenty of jargon in there that the average person might not be fully aware of. The LVR stands for loan to value ratio. To say that a loan has a 60% LVR is to say that the value of the loan is 60% of the value of the home, meaning that you would have saved up a deposit that is worth 40% of the value of the home.
To say that it is a lo doc loan is to say that the borrower either can’t or prefers not to provide proof of their income. Lo doc essentially means that you will not be required to provide as much documentation as you normally would. Rather than offering proof of your income, you will simply declare it.
Putting all of this together, a 60% LVR lo doc loan is a loan where you would save up a 40% deposit and you would declare your income rather than supplying documentation of it. This option is intended for people who are self-employed, where it is difficult to provide reliable documentation of your income.
Are Lo Doc Loans with a 60% LVR Still Available?
For the majority of types of loans, the answer to that question is still “yes.” Lenders who are willing to provide this type of loan are still quite numerous, and include national banks, local banks, and non bank lenders.
Since banks are often hesitant to work with people who will not or cannot supply proof of their income, it is a good idea for a borrower to get in touch with a mortgage broker. A broker is your “inside man” (or woman). They know which lenders will be willing to work with you, and which ones will offer you a fair deal, rather than trying to charge you unfair interest rates by exaggerating the risks of your situation. In many cases, brokers also have special deals worked out with the lenders, allowing them to offer you loans that you wouldn’t be able to receive otherwise.
Since you are providing a 40% deposit, the risks to the lender are minimal. In the unlikely situation that you were unable to pay off your loan, the bank would be forced to take possession of the property and sell it. With a 40% deposit, the odds that they would still make a profit or at least break even are very high. With this level of security, many lenders are willing to offer a loan with terms very similar to the loans they would offer their “normal” customers.
That said, none of this means that lenders will offer a loan to anybody with enough equity. They still prefer not to kick people out of their homes, nor do they enjoy trying to sell homes on the market. Selling homes isn’t a bank’s job, after all.
Do You Need to be Self-Employed?
At this point, you do. In the past, it was possible for PAYG employees to apply for a lo doc loan, but this option is no longer available. Consumer credit protection laws have been introduced that make this type of loan illegal in the vast majority of cases.
Is it Possible to Refinance with a 60% LVR Lo Doc Loan?
In most cases the answer is “yes.” Lo doc loans with an LVR higher than 60% often require lender’s insurance because the lender feels that they are in a position of risk. But with a 40% deposit, the risks are much lower, and you will typically be able to refinance as long as you have a reasonable reason to do so and your financial situation looks good.
Will Bank Account Statements or a BAS Be Required?
In many cases, they will be, but the answer to this question will actually depend on which lender you are working with. There are some lenders who will be willing to offer this type of loan without either form of documentation. These lenders can be quite difficult to find, so you will want to talk with a mortgage broker if you feel that this is a necessity.
That said, it is often a good idea to provide this information anyway. There is no benefit to getting approved for a loan that you cannot afford to repay. Defaulting on a mortgage means that you will lose your home, and that your credit rating will be destroyed for many years to come.
It is also wise to keep in mind that the less documentation a lender asks for, the more likely it is that they will charge you higher interest rates. They are putting themselves at risk by not asking for any kind of verification. Lenders that are willing to do this have to make a profit one way or another.
Learn more about lo doc loans.
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.
Becoming a guarantor for a friend or relative can be a very risky business. Consider the case of Nadia and John Abdelkodous. This couple from Sydney decided to help their son purchase a home in the Prestons in 2001, so they borrowed $494,000 from Adelaide Bank and used their home as collateral.
In 2005, their son defaulted on the payments and the bank issued a default order. The Abdelkodous couple began making the repayments, but were unable to continue in 2009. The bank acquired a default judgment against the couple, and they claimed that their son had forged their signatures when he obtained the loan.
A lot of cases similar to the case of the Abdelkodous family have been in court lately. All of these cases involve guarantees, promises made by a third party to repay a loan if the borrower defaults on it. Guarantees are usually made when the lender does not feel certain that the borrower has the capacity to repay the loan. If for any reason the borrower does not make all of the required payments, the guarantor will be held personally responsible for the debt, as well as any outstanding interest, fees, or charges.
Many people who agree to become a guarantor don’t understand the risks of doing so. In most cases, the guarantor’s home is all they have to offer as collateral, and they may also have limited income. If the borrower defaults on the loan and the lender asks for payment from the guarantor, he or she will often not be able to afford it. In addition, fraud is also involved in many cases of this sort.
Some professionals in the mortgage law industry feel that the process of becoming a guarantor for anyone should be made illegal. Most guarantors end up in trouble as a result of the decision, especially when a business loan is involved. It is possible to create a business plan that does not involve a guarantor, and this is a much better course of action.
In recent cases, judges have been likely to cancel a loan if they feel that the guarantor did not understand what he or she was getting into. In these cases, it is decided that the lender should not have accepted the guarantee. Sometimes lenders will allow a guarantor to sign based solely on the value of his or her assets, which simply isn’t enough. However, though some judges are sympathetic to the plight of an unsuspecting guarantor, it is more common for the court to hold the guarantor responsible for the loan. In fact, in cases where it is discovered that the guarantor was involved in some sort of fraud to help the borrower, the courts almost always force the guarantor to take responsibility for the debt.
Guarantors often say that they only agreed to sign a guarantee because they felt pressured into doing so. However, there are other options that should always be considered before agreeing to act as a guarantor. The individual could instead agree to loan the borrower money for a deposit interest-free. You could also suggest that the borrower save money for a while before attempting to acquire the loan.
Another example of a guarantee gone wrong comes from the case of Fast Fix Loans v Mladenko Samardzic. The guarantors in this case were the parents of a son who needed additional funding for his business. The son arranged for his parents, who were older and not native English speakers, to take out a mortgage on their property. The court ruled that the parents were not coerced into signing the paperwork and that they were willing to take the risk. However, the court also ruled that the loan would be canceled due to the fact that the lender did not verify that the parents would be able to repay the loan.
Though it is not recommended that anyone become a guarantor, some people will inevitably choose to do so anyway. If you decide to become a guarantor, there are several things you should consider before signing a guarantee. First of all, you should make certain that the borrower has a consistent, reliable source of income that he or she can use to repay the loan.
If you are signing a guarantee for a business loan, you should ask to see financial statements from the business. You may also want to get the opinion of an accountant. Next, you need to verify your own financial situation to make certain that you would be able to take responsibility for the debt if the borrower defaults on the loan. You should also discuss the details of the loan with the lender to find out exactly what amount you will be held accountable for.
Finally, you need to obtain a detailed copy of the loan contract so that you have a record of the agreement. Never agree to sign as a guarantor for a loan with no end date, such as a line-of-credit loan. You don’t want to be tied to a loan that will never be paid off. Deciding to be a guarantor is a very important decision and is not to be taken lightly in any case. Before you sign on the dotted line, make sure you know what you are getting yourself into.
What is Genuine Savings?
Genuine savings is a policy recently re-introduced by lenders wherein you must now prove a minimum of five percent savings over a period of three months to qualify for a home loan.
Each lender has variances as to what they define Genuine Savings to be; as such it is recommended that you do your research, or alternatively speak with a specialised Mortgage Broker who understands the different concessions each lender provides.
Why are lenders so strict when it comes to this policy now?
Lenders have tightened their belts ever since the Global Financial Crisis (GFC), and as a result have removed the availability of 100% loans. This type of loan is now only available with a Guarantor or Family Guarantee Mortgage.
The Director of The Home Loan Experts, Otto Dargan said “The reasoning behind this is that history has proven that First Home Buyers have the highest percentage of defaults on their home loans. Therefore, to mitigate this risk to the banks, Genworth and QBE have introduced a Genuine Savings Policy which shows the borrower’s ability to save and also to repay their loans.
Genworth can consider non-genuine savings loans, under their Home Buyer Plus product, however this does come with a much higher LMI premium and a stricter lending criteria.”
What qualifies as Genuine Savings?
Genuine Savings must add up to 5% or more of the purchase price of the property. Below is a list of what lenders consider as Genuine Savings (This does vary per lender):
- A Share Portfolio or Managed Fund held for a minimum of 3 months.
- Term Deposit held for 3 months.
- Savings or Everyday Transactional Account held in and/or accumulated over 3 months.
- Equity you already have within an existing property.
- Rental history from a Real Estate Agent (restrictions apply, and not all lenders consider this to be genuine savings-please see below for more information on this).
- Funds held in a federal government First Home Saver Account.
Please Note: Lump sum deposits into accounts are generally not considered as Genuine Savings, as lenders do prefer to see bank account statements showing regular and constant deposits.
Rent Payments as Genuine Savings.
A select few lenders will consider rental history as Genuine Savings; however they do have strict criteria that need to be met in order to receive this policy exemption:
- The property you are currently renting is through an authorised Real Estate Agent or Licensed Property Manager.
- Those on the rental agreement or lease, must be the same as those on the home loan application.
- You must have been renting at least the past 12 months with no late payments present on the Real Estate Rental Ledger.
- Although a select number of financial institutions will consider Rental History as Genuine Savings, you will still be required to provide proof that you have sufficient surplus funds to complete the settlement of your loan.
How do I apply for a Home Loan with Genuine Savings?
An experienced Mortgage Broker such as The Home Loan Experts will be able to assist you with structuring your Home Loan to best meet the lenders criteria.