11/04/08: Pitfalls of Guaranteeing a Loan
By Benny L. Kass
Q: My husband and I guaranteed our son's loan at the mortgage company's insistence when he purchased a home 4 years ago. At that time he was starting a family practice residency and earned a modest salary. He completed his residency a year ago and has a much higher income as a practicing physician. Other than the mortgage, he has no other major debts.
Now that he is established, my husband and I asked to be removed as guarantors at this time and our son agrees. However, when he contacted his lender, he was informed that will be a fee of $900.00 to do this, in addition to a $48.00 fee for a credit report for our son and some other smaller fees. This strikes us as outrageous and we are seeking your opinion as to whether this is an acceptable practice or if we should complain to someone, and, if so, to whom should we address our complaints .
A: You are to be congratulated on your son's achievements.
In your situation, unless the loan guarantee is a potential problem for you, I would just leave it alone. Your son is making a good living, and so long as he makes his mortgage payments and is not in default, the lender will not be looking to you as the guarantor.
The dictionary definition of a guaranty is “ an undertaking to answer for the payment of a debt or the performance of a duty of another in case of the other's default ” . As guarantors, you sign a legal document that creates a legal obligation on you. But there are many different kinds of guarantees. Some will have you agree to pay the loan regardless of whether the person who signed the loan documents (your son in this case) is in default. Other documents will only trigger your obligation if the borrower actually goes into default.
Additionally, some guarantees will run for the length of the loan, while others will have a “ burn-off ” provision – your legal obligation will decrease over time.
When your son first obtained his mortgage loan, his lender did not believe that his credit was strong enough for him to get the loan on his own. Accordingly, you and your husband agreed to guarantee that loan. For all practical purposes, you were on the hook for your son's mortgage. From my experience, I suspect that the legal document you signed obligated you to pay the lender whether or not your son actually went into default. I further believe there is no “ burn-off ” .
Now, his income and his credit standing is good. But lenders always want as much security as they can get. In order to cancel your guarantee, the lender not only wants to confirm his credit with a credit reporting agency, but wants you to pay a hefty fee.
There is no “ acceptable practice ” . Lenders basically can charge whatever they can get away with. If you really want out of that guarantee, you will have to accept their conditions.
Your guarantee may be considered as a potential problem should you plan to obtain a loan for a home or a car. Since you are both legally obligated to make a large payment to your son's mortgage lender, other lenders will take that into consideration when determining your credit worthiness for a new loan.
However, once that new lender understands the situation and sees that your son's credit is good, I doubt that the guarantee will be an impediment. If you and your husband have good credit, you should be able to get another loan.