35 year old, Sumit Vyas was a bit stumped when his brother asked his help to secure a joint home loan. After explaining the situation, his brother said, “You can act as a co-signer or co-applicant. It’s up to you.” He didn’t want to refuse, but the amount was big and the financial commitment would be huge. Plus, he didn’t know much about what entails being a co-signer or co-applicant. Sumit wanted to clearly understand what he was getting into. You should too if you’re under similar circumstances.
Co-borrower, co-owner, co-signer, and co-applicant — these may be a bunch of similar-sounding terms. But there’s a fine line that distinguishes one from another. How exactly these terms are different and what their legal implications are, is something you would want to know if you’re someone in a situation to co-sign a home loan or planning to apply for one.
So let’s find out the differences before you sign in a home loan document.
Co-Signing a Home Loan Agreement
Banks and housing finance companies stress for a co-signer, especially when the primary borrower doesn’t have a good credit score. But nowadays, especially for big-ticket loans like home loans, lenders often make it mandatory to have a co-signer in order to reduce their risks.
A co-signer, also known as a guarantor, needs to sign the application for the home loan together with the main borrower. However, the most important factor you should know beforehand is that co-signers do not have any rights or title to the asset on which the loan is being taken, and banks do not allow co-signers to use the loan in any way. A co-signer, though not responsible for EMI payments, is, however, equally liable for the home loan repayments.
What it Means to Be a Co-Applicant of a Joint Home Loan
Co-applicants of a joint home loan have a joint responsibility along with the primary borrower in repaying the loan. Co-applicants, therefore, to safeguard their interests, must ensure smooth repayment of the loan. Banks and financial institutions are usually insistent to make co-owners the co-applicants, but the opposite may not apply. In certain cases, where a co-owner is also a co-applicant, defaulting on the loan EMIs will deprive them of their rights to the property. In general, a co-applicant becomes a party to a loan agreement, to comply with the eligibility criteria of the lender.
Applying for a Home Loan as a Co-Owner
As the name implies, co-owners of a property have a legitimate ownership stake in the asset. As mentioned before, most housing finance companies, financial institutions, and banks insist co-owners become co-applicants in a home loan agreement. This is because a co-applicant has an equal legal obligation to repay the loan if the first applicant defaults. While all co-owners can be co-applicants, the opposite doesn’t always have to be true, as all co-applicants need not be co-owners. Moreover, co-owners who are also co-applicants are eligible for tax benefits, but not the other way around.
Who’s a Co-Borrower?
A co-borrower is an individual who, together with the main borrower, has a key role to play in assuming responsibility for the repayment of the home loan. Along with the main borrower, a co-borrower is also legally liable for the loan repayment, if by any chance the main borrower does not repay the debt. A co-borrower is not the property’s co-owner, and therefore, may not get tax benefits. Also, co-borrowers should be the closest relatives, or married couples, with a consistent income source.
Things to Remember
The very first thing to understand before you sign on the dotted line whether as a co-signer, co-applicant, co-borrower, or co-owner is: As soon as you put your initials on the bank documents, you’re setting yourself up for a liability from which there’s no way back.
Due diligence is crucial
Signing a loan agreement simply because a friend or relative of yours desperately seeks a home loan could potentially land you in a sticky situation if you proceed without doing proper due diligence. Therefore, before taking responsibility for a long-term financial burden, such as a joint home loan, you should know about the individual’s income status and other financial obligations they have.
Stay in the loop
Your responsibilities are the same as the principal borrower, regardless of whether you are a co-signer, co-applicant, co-owner, or a co-borrower. So if they default or are unable to carry on with the payment at any point in time, you will be fully responsible. At the same time, the overdue payments will not only hurt the main borrower’s credit score but yours as well. A poor credit score limits your chances of being granted a loan at a reasonable rate of interest in the future. This is why it’s necessary to keep a track of the loan and ensure that the payments are being made on time.
Be cautious and well-prepared
Note that banks and housing finance companies ask for supplemental support only when their loan approval department feels that the principal borrower cannot manage a long-term, big-ticket loan. If a financial institution requests third-party help, it means that either the principal borrower’s CIBIL rating is poor or the income does not meet the loan requirements. This is a clear sign to distance yourself from the home loan agreement. However, if you are confident of the primary borrower’s repayment capacity, you still need to have an alternative plan to deal with the mess that can arise from non-payment. The only option for you is to set aside a fund that you can use to make payments if the main borrower defaults.
While there are small differences between a co-borrower, co-owner, co-signer, and co-applicant, they all come with significant financial responsibilities. So before signing a joint home loan agreement along with a primary borrower, think about how it may affect your future plans and commitments. Consider consulting a legal expert to get a more well-rounded perspective before taking such a step.