Know Everything About a Home Loan Guarantor

Finance

If you are thinking of getting a new home loan, you must meet a list of specific requirements set by the lender. Usually the financial organisations have strict norms for approving the loan request. And, if you fail to meet any of the requirements, chances are high that the lender may reject your home loan.

However, there are ways to improve your loan eligibility. One such way is to apply for a loan with a guarantor.

Who is a home loan guarantor?

A home loan guarantor is an individual who agrees to accept the repayment responsibility on behalf of the loan applicant. The guarantor must have a strong financial profile with a high credit score. The lenders generally grant the loan on the basis of a guarantor knowing that if the applicant defaults on the repayment, they can receive the payments from the guarantor.

All the terms and conditions that apply to the primary borrower apply to the guarantor and they become legally obliged to repay the amount. Getting a guarantor is not an inherent home loan process but lenders generally ask for a guarantor under following circumstances.

  • If the borrower is old aged or nearing the retirement age
  • If the borrower does not have a minimum income required by lender to qualify for the loan
  • If the borrower is involved in a high-risk profession like mining, armed forces, shipping, merchant navy, etc.
  • If borrower wants to borrow a high amount
  • If the borrower does not meet the minimum credit score requirement or has a bad credit history

Types of Guarantor

If you are going to sign a guarantor for your friend’s home loan, it is paramount that you know what type of guarantor you will be. Generally, there are two types of guarantors – Financial Guarantor and Non-financial guarantor. Let us know more about it.

If the borrower ask you to sign as a financial guarantor, it is advisable to be wary about it before you sign the policy papers. This is because when you sign as a financial guarantor, you accept the repayment responsibility if the primary borrower fails to repay the loan or defaults on the EMI payments. Hence, it is better to avoid signing as a financial guarantor unless the person is a close family member or you trust them to repay the amount diligently on time till the end of loan term.

If you sign as a non-financial guarantor, you would not be legally obliged to repay the loan. But, you would only act as a character certifier of the person applying for a loan. If the primary borrower is unreachable, the lender will reach out to you to communicate the loan-related issues.

Would signing as a home loan guarantor affect your financial credibility?

Yes, if you sign as a financial guarantor, and the borrower fails to repay the amount on time, then you will not only have to bear the repayment burden but it will affect your financial credibility as your credit score will drop. Also, if you are planning to apply for a home loan in the future, the lender may consider you a high-risk borrower and your eligibility could be affected.

Even if the lender approves your loan application, you may have to pay higher interest. You can use the online EMI calculator to know the difference in the interest rate you would pay if you did not sign as a financial guarantor.

Final Word

So, be aware of the risks of signing as a home loan guarantor and avoid it especially if you want to apply for a home loan.