All You Need to Know About Home Loan Guarantors

By siliconindia  |  Wednesday, 17 August 2022, 03:54:13 PM IST

All You Need to Know About Home Loan Guarantors

Despite the relative ease of applying for a home loan, your home loan application should still be a measured, calculated move, as the quality of your application holds immense power over the kind of home loan you stand to receive, in terms of the loan amount, home loan interest rate, repayment tenor and options, and other things. Hence, to receive the home loan that supports your dream home plans, it is imperative that you pay attention to the finer details of your home loan application. 

Every lender has a set of home loan eligibility criteria that help them assess the quality of your home loan application, and your repayment capacity. This is a crucial juncture in your home loan application process, as this determines your risk levels – either minimising it or elevating it in their eyes. If your home loan eligibility falls short, it could endanger your chances of securing a low interest home loan at favourable terms. 

However, introducing a home loan guarantor could help mitigate the drawbacks of your home loan application, if any, and help you gain better terms on your home loan. Lenders view guarantors as a favourable addition to your loan application, as they pose as assurance for loan repayment, should any chance of payment delay or default arise. This is not to say that your loan eligibility is poor without a home loan guarantor, but even applicants with strong financial profiles can gain more, if they can add a guarantor to their home loan application. 

Confused about who a home loan guarantor can be and what they bring to the table? Read the full article to know more. 

Who is a Home Loan Guarantor?

A home loan guarantor agrees to repay the borrower's home loan EMIs, if they are unable to make the payments at any point during the loan tenor. The home loan guarantee is an agreement between three parties: the lender, the borrower, and the guarantor. Anyone can be a home loan guarantor - your spouse, parents, relatives, or friends - if they demonstrate a strong credit profile and match the other eligibility benchmarks.

When Do Lenders Ask for a Guarantor?

While having a home loan guarantor is always a good-to-have, on your home loan application, in some cases, lenders may insist on it. Here are some possible scenarios in which a home loan guarantor can be mandatory, to secure a competitive home loan: 

  • When the applicant has a poor credit history or credit score and has previously missed multiple credit repayments.
  • If the applicant is close to the end of their working years with limited repayment capacity. 
  • If you switch jobs frequently and your cash flow is inconsistent.
  • If the applicant fails to meet any other parameters of home loan eligibility.

Thinking of becoming a Home Loan Guarantor? The Top Five Factors to Consider Before You Do

Before you agree to be a home loan guarantor, keep in mind these crucial factors that could have a sound bearing on your credibility, as well as your credit:

1. Type of Guarantor 

There are two kinds of loan guarantors:

Financial Guarantor

When you sign up as a financial guarantor, lenders will also assess your financial position. If the principal borrower defaults on the loan, you will be held liable for the repayments. You should take on this responsibility only if you have sufficient confidence in the applicant's ability to shoulder the loan. 

Non-Financial Guarantor 

There is no repayment burden when you sign as a non-financial guarantor. You simply serve as a character/identity certifier and the contact person, if ever the lender fails to connect with the main borrower.

2. Borrower's Credit Profile

It always helps to know more about the applicant's credit profile. Before signing as a guarantor, remember the following points:

  • Request for the applicant's credit report.
  • Check the bank account statements where the salary is credited and also used for paying the EMIs.
  • Cross-check the documents to understand the debt-to-income ratio and assess the repayment ability. Avoid becoming a guarantor if you are not satisfied with the applicant profile.

3. Impact on Loan Eligibility

This is probably one of the most significant factors that one should look at. Being a guarantor affects your credit too. So, if you intend to secure a large loan sometime later, lenders will factor in your obligations as a guarantor when you apply for home loan. In the event the borrower defaults, paying the outstanding dues, adversely affects your credit profile and budget. This could reduce your eligibility to a great extent, resulting in a loan that fetches you a smaller loan amount at higher interest rates and stringent loan terms.

4. Restricted Credit Limit 

The moment you become a loan guarantor, the credit bureau recognises the loan as a lien on your existing credit. As a result, your credit card usage limit, overdraft facility and business line of credit might be reduced.

5. Need for Guarantor

It is important to establish why the borrower needs a guarantor to understand his/her circumstances. Whatever maybe the reason - insufficient earnings, no income stability or expected loss in salary due to retirement - default could be probable. 

Can You Withdraw Your Name as a Guarantor?

It is very difficult to strike out your name as a guarantor, but not impossible. If the borrower introduces a replacement, the lender may permit you to withdraw. It is advisable for borrowers to take a home loan insurance, which can stand guarantee for missed or outstanding EMIs. And if they can provide a secondary collateral as well, your liability will be further reduced in case of a loan default. 

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