Despite the relative ease of applying for a home loan, your home loan application should always be a measured and calculated decision, as the quality of your application has immense power over the type of home loan you are likely to receive, in terms of Amount of the loan. , home loan interest rate, term and repayment options, and other things. Therefore, 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.
Each lender has a set of home loan eligibility criteria that help them assess the quality of your home loan application and your ability to repay. This is a crucial time in your home loan application process, as it determines your level of risk – either minimizing it or raising it in their eyes. If you don’t qualify for a home loan, it could jeopardize your chances of getting a low-interest home loan on favorable terms.
However, the introduction of a home loan guarantor could help ease the inconvenience of your home loan application, if any, and help you get better terms on your home loan. Lenders view guarantors as a favorable addition to your loan application, as they act as insurance for the repayment of the loan, in case of risk of delay or default. That’s not to say your loan eligibility is bad without a home loan guarantor, but even applicants with a strong financial profile can earn more if they can add a guarantor to their home loan application.
Not sure who a home loan guarantor can be and what they bring to the table? Read the full article to learn more.
What is a mortgage guarantor?
A home loan guarantor agrees to repay the borrower’s home loan EMIs, if they are unable to make the payments at any time during the term of the loan. The mortgage 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 meet the other eligibility criteria.
When do lenders ask for a guarantor?
Although having a home loan guarantor is always a good thing to have in your home loan application, in some cases lenders may require it. Here are some possible scenarios in which a home loan guarantor may be required, to secure a competitive home loan:
- When the applicant has a bad credit history or bad credit rating and has already missed several credit repayments.
- If the applicant is near the end of his working years with limited repayment capacity.
- If you change jobs frequently and your cash flow is inconsistent.
- If the applicant does not respect any other parameter of home loan eligibility.
Are you considering becoming a home loan guarantor? The top five factors to consider before doing so
Before agreeing to be a home loan guarantor, keep in mind these crucial factors that could affect your credibility, as well as your credit:
1. Type of Guarantor
There are two types of loan guarantors:
Financial guarantor
When you sign up as a financial guarantor, lenders will also assess your financial situation. If the primary borrower defaults on the loan, you will be responsible for repayments. You should only take on this responsibility if you have sufficient confidence in the applicant’s ability to afford the loan.
Non-financial guarantor
There is no reimbursement charge when you sign as a non-financial guarantor. You simply serve as a character/identity certifier and contact person, should the lender ever fail to connect with the primary borrower.
2. Borrower’s credit profile
It is always useful to know more about the applicant’s credit profile. Before signing as a guarantor, remember the following points:
- Applicant’s Credit Report Request.
- Check bank account statements where salary is credited and also used to pay EMIs.
- Cross-check documents to understand debt-to-income ratio and assess repayment capacity. Avoid becoming a guarantor if you are not satisfied with the candidate’s profile.
3. Impact on Loan Eligibility
This is probably one of the most important factors that one should look into. Being a guarantor also affects your credit. So, if you intend to obtain a large loan later, lenders will take into account your obligations as a guarantor when you apply for a home loan. In the event of borrower default, payment of unpaid dues negatively affects your credit profile and budget. This could significantly reduce your eligibility, resulting in a loan that pays you a lower loan amount at higher interest rates and strict loan terms.
4. Restricted credit limit
The moment you become a loan guarantor, the credit bureau recognizes the loan as a lien on your existing credit. As a result, your credit card usage limit, overdraft facility and business line of credit may be reduced.
5. Need a guarantor
It is important to establish why the borrower needs a guarantor to understand his situation. Whatever the reason – insufficient income, no income stability, or expected loss of salary due to retirement – default could be likely.
Can you remove your name as guarantor?
It is very difficult to cross out your name as a guarantor, but not impossible. If the borrower introduces a replacement, the lender may allow you to withdraw. Borrowers are advised to take out home loan insurance, which can vouch for missed or ongoing EMIs. And if they can also provide a secondary guarantee, your liability will be further reduced in the event of default.