Guarantor vs. Co-signer

by | Mar 31, 2022

Do banks require that a co-signer be part owner of the secured property as well?

Video Translation

Speaker 1: (00:03)
All right. Okay. Moving on to our next question. It must be from anonymous because we don’t have a writer. So we’ll just say anonymous asks. Do banks require that a co-signer be part owner of the second property as well, would forming an LLC with the other individual help from becoming a co-signer and that’s, that’s the entirety of the question.

Speaker 2: (00:33)
That’s why there’s no right or wrong, but I think I know what they’re asking on that one. Um, first of all, in general banks love co-signers right. If you assign an, a mortgage, um, or any type of loan agreement, you don’t have to have a, a real interest in the property. Uh, but, um, when it comes to real estate, most banks want the parties who are on the loan agreement to have a vested interest in the property. Uh, I actually know that question. That’s why I could jump right into the answer. These people actually are really not, they call themselves co-signers, but really what they were were guarantors. Okay. And you know, the difference between a guarantor and a co-signer

Speaker 1: (01:30)
No,

Speaker 2: (01:32)
Well, not much. There’s not much of a difference. A co-signer usually is somebody on a loan agreement though. Who’s actually on a loan application. So you and I could go to the bank and we could borrow money and we would be coal borrowers, and we’d be co-signers okay. Now let’s pretend you go to the bank and you get your own loan, but the bank says, you know, we really like you glare. And we know that you’re very active in the real estate market. We trust you. We just need a little bit more security. And do you have a friend or somebody who, you know, somebody who, uh, you know, was credible, like David Sobel, who would maybe co-sign or be a guarantor for you? So a guarantor does not have to have an interest in the property. Got that. So, um, lawyers call it, well, I don’t know if all lawyers call, uh, use this terminology, but the people who taught me, my mentors basically basically said to me, one day, you know, what a guarantor is, David don’t you. And I said, I don’t know. They signed David, you know, sign a bat with somebody else. And they’re like, no, a gearing tourism idiot with a pen

Speaker 2: (02:43)
Being a guarantor is not a great situation. Um, you have to have a lot of faith in your borrower. However, I know we’re going to go down a quick slippery slope. You can curtail the obligations that you may have as a guarantor. And there’s a number of different ways to do that too, too long for us, for discussion tonight. And you’re probably signing their Blair like, oh, good. But if you, um, you can go to our website of proven resource.com. We have a whole article on how to change, reduce, modify, uh, limit your legal exposure and financial exposure as a guarantor. Okay. Okay. But a co-signer and a guarantor are very similar.

Speaker 1: (03:29)
Okay. So, so to answer this person’s question, the second portion of their question is, would forming an LLC with the other individual help from becoming a co-signer?

Speaker 2: (03:46)
No, I didn’t even understand that part, but, um, they’re just trying to hide not high, but, uh, put an extra layer between their personal liability, uh, to a bank and you know, their corporate liability.

Speaker 1: (04:00)
Okay. Yeah. So it seems like this question is there is someone who wants to help out, but wants to keep, keep it kind of at arms length a little bit, you know, facility liability, et cetera, which, which I, uh, you know, and I don’t blame them. So the last time I had a co-signer was student loans, like my parents co-sign loans, but outside of that, I’ve never had a co-signer, especially for, for any real estate purchase. So that’s not anything that I’m aware of any way.

Speaker 2: (04:36)
Here’s the thing about the co-signer. So like when your parents co-sign for you, um, this goes to the illustration of, you know, they’re really, co-applicant somebody looked at their financial and credit, uh, credibility and their financial, where, you know, wherewithal, when they made the loan to you, Blair, let’s say for your student loan, they still look to your folks. So the co-signer somebody from my perspective is somebody who’s still, they may not have to make a complete application, but they do have to be verified in their, their, um, borrowing ability. You know, are they going to be a good debtor? That’s what a cost center is. And the guarantor is just one more person to remove. We don’t care who the guarantor is. If they, you know, most banks would just say, oh, you can guarantee if you have a house, maybe some money, but we’re not going to really qualify you if you want to stand up and step into the shoes of the borrower. Go right ahead. That’s the difference? I do have one more comment, though. If a loan is taken out by a limited liability company or an S-corporation, pardon me? A C corporation, sorry about that. Um, the corporation is the primary borrower. Then what a bank will do, however, is then make the individual, a guarantor

Speaker 1: (05:58)
Individual

Speaker 2: (05:59)
Actually has an interest in the company.

Speaker 1: (06:01)
That makes sense. Okay. Okay.

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DAVID SOBLE

DAVID SOBLE

Real Estate & Finance Attorney

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