In India, financial organisations, including banks and HFCs have specific norms and rules for approving home loan requests. And they require the home loan applicants to meet specific conditions to be eligible for the loan. Sometimes, even if the individual meets the lender’s eligibility criteria, they may need to get the home loan documents signed by a guarantor.
When do lenders ask for a home loan guarantor?
The financial organisations ask the borrower for home loan guarantor under following conditions:
- If the amount they want to borrow is beyond the limit as per their policy
- If the person applying for a loan has a low credit score or does not meet the minimum credit score requirement
- If the borrower has a poor credit history and has defaulted on their repayments
- If the home loan applicant is involved in a high-risk profession or work in a dangerous environment that poses a threat to their life
- If the borrower is old aged
- If the borrower does not meet their minimum monthly income criteria
The primary reason why lenders ask for a guarantor is to ensure that they get back their money even if the primary applicant defaults on the payment.
Who can be a guarantor?
Anyone who is aged over years and is an Indian resident can sign as a guarantor. Generally, the lenders prefer signing only close relatives like siblings, parents, spouse or earning children as guarantor. The guarantor must have a good credit score and they must meet the lender’s eligibility criteria.
Factors to consider before becoming a guarantor
If any of your friends or relatives ask you to become a guarantor for their home loan, you must be aware of what you are signing up for. Here are a few vital things you must consider.
- The type of guarantor you will be
Generally, the lenders ask for two types of guarantors – financial guarantor and non-financial guarantor. If you sign as a former, you would be responsible to pay off the loan if the primary applicant fails to repay the EMIs on time. Also, the lender may take your financial documents as collateral to recover the money. Hence, you must be careful while signing up as a financial guarantor as you risk your financial credibility.
If you sign as a non-financial guarantor, you don’t have to bear the repayment burden. Instead, you sign as the character certifier of the loan applicant. The lender will contact you if they are unable to reach the primary borrower.
- Your home loan eligibility could be affected
Another critical factor you must consider before you sign as guarantor is that if the primary borrower fails to repay the amount, you not only will be obliged to repay the money, but it could also affect your credit score and credibility. Additionally, if you want to take a home loan in the future, your eligibility could be reduced significantly. Also, you may have to pay high home loan interest rates, or you may not get the amount that you need.
So, before you sign the home loan documents as a guarantor for someone, you must be aware of the risks involved and your rights and duties as a guarantor. Hence, it is advisable that you avoid signing as a guarantor if you want to apply for a home loan soon.