Co-Signer of a Home Loan
Co-signers usually come into the picture in a home loan if the primary borrower does not meet the eligibility criteria for a home loan because of a low credit rating. A high credit rating not only increases eligibility for a home loan, it also attracts lower interest rates as well as other favorable terms and conditions. Since the co-signer is being taken on board because of the lower credit rating of the primary borrower, it is essential that the co-signer is an individual with a high credit rating.
While the co-signer will not be responsible for the repayments of the Equated Monthly Instalments (EMI) on the home loan, they will be legally equally responsible for the loan repayments in case there is a payment default on the part of the primary borrower. However, they will not have any rights over the home loan amount nor will they be able to avail any tax benefits on the home loan repayments. They will also not have any title or right over the property on which they are co-signing. Being a co-signer could also reduce any future credit approvals and credit eligibility as well because the loan will be included in their credit record and have a bearing on their CIBIL scores.
A co-signer signs the home loan application along with the primary borrower, mainly when the principal borrower lacks a good credit rating. A co-signer neither has any right, title or interest in the property for which the loan is being used for, nor is he entitled to the right to use the loan amount as such directly. The co-signer is equally responsible for the loan even when not responsible for the EMI payments.
Applying for a Loan as Co-Applicant
Co-applicants have a shared responsibility towards repaying a loan. Banks insist that all co-owners be co-applicants but the reverse needn’t apply. Thus, the onus lies with the co-applicants to protect their interests if they are contributing to repaying a loan. In cases where the co-applicant is not the co-owner, failing to repay the loan, will take away their rights over the property. In some cases, a co-applicant may be a party to a home loan, to meet the bank’s eligibility criteria.
Before participating in a loan by playing any of the above mentioned roles, know your responsibilities and accountabilities beforehand. Sign any document after consulting a legal expert.
5 points to keep in mind
- Being a co-signer may reduce the credit eligibility of the person and may impact approval of any future credit requirement of co-signer.
- The legal liabilities of a co-owner are same as that of a main borrower.
- A co-applicant, who is not a co-owner, is not entitled to tax benefits on home loans.
- The liability of the co-signer under the home loan arises only when the main borrower commits a default in payment.
- Co-signing a loan becomes a part of co-signer’s credit record, impacting his/her CIBIL score.
Co-applicant of a Home Loan
The co-applicant of a home loan shares the responsibility of making the home loan repayments along with the primary borrower. While some banks and financial institutions mandate that all co-owners of the property should be the co-applicants of the home loan as well, it is not necessary that all co-applicants have to be co-owners. Adding a co-applicant can help to improve the chances of meeting the eligibility criteria for the loan, for the primary borrower. However, in cases where the co-applicant is not the co-owner, if they fail to repay the loan, they will not have any rights over the property. Also, co-applicants who are not co-owners cannot avail any tax benefits on the home loan repayments which the primary borrower can avail.
Co-Signer vs. Co-Applicant for a Home Loan
Although the terms are used interchangeably, they have distinct roles and responsibilities. Let’s get to know the difference between the two:
- A co-applicant is the one who applies with the primary borrower for the Home Loan and accepts to share the Equated Monthly Instalments (EMIs) and other responsibilities. A co-signer is the one who needs to pay, only when the Home Loan borrower is at default in making the loan repayment
- Adding a co-applicant at the time of a Home Loan application, helps to improve your eligibility criteria for a higher loan amount. As a primary borrower, if you have a lower credit rating, you become less eligible for the loan. However, this is where the co-signer comes into the picture; if the individual has a high credit rating and has a decent income, he/she can make you eligible for the Home Loan
- Due to an improved credit score of the co-signer’s profile, a primary borrower can avail loans at a lower interest rate. A co-applicant helps to share the Home Loan burden. Since a co-applicant is one of the parties to apply for the loan with the primary borrower, he/she can help to get them at an attractive interest rate
- A co-signer is not responsible for paying your EMIs; however, the individual will be liable for the repayment of the loan, in case of a default on your part. As mentioned earlier, the role of the co-applicant in a Home Loan, is to share the responsibility of the loan repayment along with the primary borrower
- If a co-applicant is also the co-owner (having a legal share) of the property, the individual is eligible to avail tax benefits. In case the applicant is not a co-owner, it is not possible to avail tax benefits. On the other hand, a co-signer cannot avail any tax benefits
- Generally, while applying for a joint Home Loan, the co-applicant is most often a spouse. Banks and financial institutions apply certain conditions if parents and children seek joint approval. A co-singer for a house can be a friend or family member, with a good credit history and a solid income.