Buying a new home is one of the most momentous milestones of our life. Apart from serving as a security, a home is considered to be an invaluable asset in terms of overall value of the property. Therefore, buying a new home can be financially taxing and real estate prices rarely come down to fit into the budget of an average Indian. This prolonged rise in property prices is one of the key that drives home loan applications and disbursements across India.
The majority of the Indian population is classified into the middle income category with salaried individuals as one of the key group that apply for home loans. A home loan is an advisable option that an average person can use to buy a property. To opt for a home loan means that the homeowner can slowly repay the loan through monthly installments or EMIs, over the period of approximately 20 years. This in turn will save the borrower from compromising their personal liquidity or savings, while allowing them to fulfill the dream of owning their own home.
Role of a Guarantor in Home Loan
Banks/ NBFC’s have quite a long list of terms and conditions regarding the Home Loans which the borrowers need to meet in order to be eligible for a home loan. In some cases, even if the borrower meets the eligibility criteria given by the Bank/ NBFC, still the loan documents have to be undersigned by a guarantor.
Bank/ NBFC’s usually ask the borrowers to involve a guarantor in the following cases:
- If the amount to be borrowed is beyond the limit as per bank policies
- If the borrower has a weak financial standing proportionate to the loan amount i.e. a low credit score
- If the borrower’s credit history is not clean i.e. previous loan/credit card debt settlement
- If the borrower is at an advanced age or employed in a high risk job
- If the borrower is self employed and earns less than a minimum income level
Banks/ NBFC’s generally ask the borrower to involve a guarantor and undersign the loan applications to ensure that the loan will be paid back, especially in case the primary applicant defaults.
Things to Note before You become a Guarantor
Before you undersign as a home loan guarantor, you should ask yourself few questions before you take a step towards a new commitment, i.e. to undersign the loan document. Once you sign the papers and become the guarantor, you are legally liable to repay the loan in case the actual borrower fails to repay the due loan amount.
Are you signing on as a financial or non-financial guarantor?
Banks/ NBFC’s usually ask the borrower to determine the guarantor as either a financial or non-financial guarantor. A non-financial guarantor acts as an alternate contact for the bank in case the primary applicant cannot be reached. Therefore, a non-financial guarantor is not financially liable for any failure to repay the home loan on the part of the borrower. Unlike a financial guarantor, a non-financial guarantor is kept on the records only.
What obligations are you accepting as a guarantor?
The obligation of a financial guarantor is to repay the outstanding home loan along with any interest amount and late fees due, in case the lender fails to take the debt. The law is also of the opinion that this should be rigorously enforced without any compromising terms and conditions, especially if the primary borrower is identified as a willful defaulter.
Does undersigning as a guarantor have any impact on your own loan eligibility?
As far as Banks/ NBFC’s or other financial institutions are concerned, the limit of your liability as a financial guarantor is equal to the primary borrower. As far as the credit history is concerned, any defaults or late payments made against the mortgage by the primary borrower will also impact on the guarantor’s credit score, making him or her look financially unstable.
What is the tenure of the home loan?
Though, tenor does not have any direct co-relation with the guarantor. The loan tenor is important in the sense that the guarantor will be liable till the loan is completely paid. Once the loan is fully repaid, the guarantor will need a no objections certificate (NOC) and a release of guarantor ship from the Bank/ NBFC to complete the process.
Are you financially secure and aware of the terms of the loan as a guarantor?
It is obvious that the guarantor need to be sure of its own financial standing before bearing the responsibility of being a guarantor in case of another person’s loan. You need to begin by understanding the worst and using those predictions to figure out if you are capable enough of making the home loan EMI payments in case the borrower fails to make his part. Moreover, you need to be aware of the complete terms and conditions summarized by the loan document so as to be on the top of the situation at all times.