Guarantor vs. Co-Signer

Who is a guarantor?

A guarantor is a party who vouches for you. They sign and agree to the terms set on the lease by your landlord, most notably the monthly rental payments. Keep in mind that a guarantor can be your family member, friends, or in some cases, a third-party guarantor.

A guarantor assures the landlord that the rent will be paid without any worries. A guarantor, however, isn’t entitled to occupy and live in the apartment.

Documents With Grantors And Grantees In Real Estate

Grantors and grantees have unique relationships depending on the circumstances of their transaction. They use different types of deeds and documents to outline their expectations and bind them. Here are a few you should know.

General Warranty Deed

A warranty deed is a type of legal document used in the transfer of real estate from grantor (seller) to the grantee (buyer). It comes with certain guarantees that offer extra protection to the grantee, in particular.

When a seller signs a general warranty deed, they effectively swear that there are no undisclosed title issues with the property. This promise even covers the time before the grantor’s ownership.

If a problem with the title does arise, the grantor must pay the associated legal costs.

Grant Deed

A grant deed, also called a limited warranty deed or special warranty deed in some states, facilitates the transfer of property from a grantor and grantee. It provides some protection to both parties, but not as much as a general warranty deed.

In the case of the grant deed, there are two warranties. One, that the grantor has the right to sell the property and did not sell the property to anyone prior. And two, there are no title problems, like liens or claims, against the house from their time as the owner. However, it does not protect the grantee from any claims made against the property before the grantor’s time.

So, in the end, it protects the seller from liability in the case of previous title problems and the buyer from current ones.

Quitclaim Deed

Like warranty deeds, quitclaim deeds transfer ownership from the grantor to the grantee. But it does not actually guarantee the grantor’s interest in the property. So, there is no protection in place for the grantee if they learn the grantor did not hold the property title or if they sold the real estate with property title problems.

Usually, quitclaim deeds only pop up in certain situations. For example, you may use one to transfer property between family members. Or, you may use them to transfer a title into or out of a trust. Due to the lack of protection, though, both the grantor and grantee should both confirm that they are comfortable with the parameters of a quitclaim deed before moving forward.

Special Warranty Deed

This type of deed offers an extra level of protection to the grantee, compared to some others. The grantor makes a guarantee to the buyer using a special warranty deed that the home was free and clear of legal encumbrances during their ownership. Meaning, the grantor paid their mortgage off, has the right to transfer ownership, and no creditors filed a lien against the home.

However, it only applies to the grantor’s ownership. The seller is not responsible for any claims made against the property before they owned it.

Deed In Lieu Of Foreclosure

A deed in lieu of foreclosure is a fallback method for homeowners to help them avoid foreclosure. In it, they voluntarily hand over ownership of their home to their mortgage lender.

In effect, a deed in lieu of foreclosure can help you avoid a foreclosure showing up on your credit report and release you from the responsibility of your mortgage. It can potentially benefit both parties, though. With the transfer, both the lender and borrower avoid the costs and consequences of the lengthy foreclosure process.

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Title Insurance And Warranty Deeds For A Grantor And Grantee

Do you need title insurance if you are the grantee of a general warranty deed? The answer is yes. 

Your lender will require you to purchase title insurance anyway for its benefit. Buying an add-on policy for your benefit is relatively cheap, and in most cases, a seller can be persuaded to shoulder the extra cost so they never have to worry about backing up their warranty personally. 

Title insurance pays for all costs arising out of a title claim, and some may not have originated on the seller’s side. Even with a general warranty deed, the grantee would have to hire a lawyer to enforce the warranty provisions of the deed. That legal action is costly, and you won’t get your costs reimbursed if the grantor is dead or insolvent by the time the claim is raised. 

Guarantors vs. Co-signers

A guarantor differs from a co-signer, who co-owns the asset, and whose name appears on titles. Co-signer arrangements typically occur when the borrower’s qualifying income is less than the figure stipulated in the lender’s requirement. This differs from guarantors, who step in only when borrowers have sufficient income but are thwarted by lousy credit histories. Co-signers share ownership of an asset, while guarantors have no claim to the asset purchased by the borrower.

However, in the event the borrower has a claim against a third party that has caused the default, the guarantor has the right to invoke a process called “subrogation” (“step into the shoes of the borrower”) in order to recover damages.

For example, in a rental agreement, a co-signer would be responsible for the rent from day one, whereas a guarantor would only be responsible for the rent if the renter fails to make a payment. This also applies to any loan. Guarantors are only notified when the borrower defaults, not for any payment before that.

In the event of a default, the guarantor’s credit history may be adversely affected, which may limit their own chances of securing loans in the future.

In essence, a co-signer takes on more financial responsibility than a guarantor does as a co-signer is equally responsible from the onset of the agreement, whereas a guarantor is only responsible once the primary party to the contract fails to meet their obligation.

How Do You Qualify as a Guarantor?

Different agreements and different lenders have different requirements for a guarantor. At the minimum, a guarantor will need to have a high credit score without any issues in their credit report. They will also have to have an income that is a certain multiple of the monthly or annual payments.

Guarantor vs. Co-signer: Who’s better for me?

Your decision to choose a guarantor vs. co-signer depends on who will vouch for you financially and whether you want to live alone or with roommates. The first four differences are pretty self-explanatory from the table above, but let’s talk about the last one, i.e., the risk of eviction.

A co-signer can provide significant benefits like splitting the rent. But they also take a higher risk by signing the lease. If your co-signer roommate fails to pay the rent, the burden can fall on you. Even when you’ve paid your portion of the rent, you run the risk of eviction. You can also be sued for the entire lease term.

A guarantor, however, uses collateral as a pledge to the landlord. If the lease has defaulted, they could lose the collateral they put up. Ultimately, you could be sued by the guarantor if you fail to pay them back.

Related: What happens to the tenants if the guarantor decides to exit from the contract of rental property?

Deeper definition

The word “grantor” is a legal term commonly used to describe a person or entity that creates a trust and transfers ownership of assets to the trust through a “deed.”

The grantor is always the person or entity that gives away certain property or rights to another person or entity, known as a “grantee.” A grantee also may be called a “beneficiary,” a term commonly used in trusts, wills and life insurance policies.

In a grantor trust, the grantor makes a trust and conveys assets to it. This kind of trust is usually revocable. The grantor can modify the terms of the trust or even revoke it altogether, as long as he is alive. However, upon his death, the trust becomes irrevocable, which means it must be administered based on the terms that the grantor stipulated when he was living. Nobody can make modifications to it once the grantor has died.

The person who creates a grantor trust can maintain control over the assets in the trust. He can make decisions about the assets just as he did before the creation of the trust and appoint himself as its trustee.

The job of the trustee is to properly manage the assets in the trust and make sure they are managed in the best interest of the beneficiary on behalf of the grantor. If the grantor doesn’t want to serve as the trustee, he can appoint another person or entity do so in his place.

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How Does Granting Ownership Work?

A grantor transfers property ownership by granting it to another person through a property deed. Transferring ownership in a real estate transaction is complex due to the laws involved.

If you're selling a home, you'll likely need a real estate lawyer to help you draw up the necessary contracts so that you grant the house to the buyer properly. You'll fill out the paperwork for the transaction, which includes a property deed transfer request to the buyer, who is the new owner. You've assumed the role of the grantor by selling your home to someone else.

Buyers and sellers should always sit down with their lawyers ahead of time to discuss the type of deeds they will use to convey or receive property and why.

A deed must identify both the grantor and grantee and include a full description of the asset in question. Deeds with vague language can confuse and pave the way for one or both parties to file a lawsuit.

Closing attorneys usually ensure that deeds documenting the transfer of a title are recorded at the county courthouse in the county where the property is located. That serves as proof that the transfer was legal.

Luckily, a deed is not set in stone for all time. The grantor or grantee can modify them to include covenants and other rules stating how an asset can be used, sold, or reclaimed. You should always make sure to obtain a title insurance policy when you’re buying a home, just in case.

In addition to real estate deeds, other documents require the identity of these parties as well. Landlords and renters have grantor and grantee relationships; sellers and buyers of motor vehicles also have deeds.

You'll also see grantors and grantees when dealing with wills or financing contracts. Some business arrangements and partnerships can require a grantor and grantee relationship, but that isn't as common.

When is a co-signer or a guarantor a good option?

You may consider a co-signer vs. a guarantor if you have a roommate in mind who’s looking to share a space. Co-signers can help you secure a lease while also helping save money because you’re splitting the rent equally. A guarantor is a good option when you’re looking to live alone or don’t want a roommate but need someone to back you up financially in order to obtain the lease.

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