5 Things to Know before Signing on as a Home Loan Guarantor.

Acquiring a new home has to be one of the most momentous milestones in life. Apart from the security it offers, a home can be considered an invaluable asset in terms of overall net worth. However, purchasing a new home can be financially taxing and real estate prices rarely decline to fit into the budget of the average Indian.  This sustained rise in property prices has been one of the key drivers of home loan applications and disbursements across India.

The bulk of the Indian population can be usually grouped into the middle income bracket with salaried individuals as one of the key groups that apply for home loans. As such, a home loan may be the only option that the average person can use to purchase a property. Opting for a home loans means that the homeowner can slowly, over a period of approximately 20 years, repay the loan through monthly installments or EMIs. This in turn would save him or her from having to compromise their personal liquidity / savings, while allowing them to realize the dream of owning their own home.

Role of a Guarantor in Home Loan

Home loan providers have quite a long list of terms and conditions which borrowers need to meet in order to be eligible for a loan. There are cases where, even if the individual borrower meets the eligibility criteria outlined by the lender, he or she might be asked to have the loan document undersigned by a guarantor.

Lenders usually ask borrowers to enlist a guarantor in the following cases:

• If the amount to be borrowed is beyond a certain limit as per bank policies
• If the borrower has relatively weak financial standing i.e. a low credit score
•  If the borrower’s credit history is not particularly clean i.e. previous loan/credit card debt settlement
• If the borrower is employed in a high risk job or is at an advanced age
• If the borrower is self employed or earns less than a pre-determined minimum income level

Banks and lending institutions generally ask a borrower to have a guarantor undersign loan applications in order to ensure that the loan can be paid back, especially in case the primary applicant defaults.

Things to Note before You become a Guarantor

As a home loans guarantor, you need to ask yourself a few questions before you commit to undersigning the loan document. Once you sign the papers, you will be legally liable to repay the loan in case the actual borrowers fail to repay the loan amount due.

1. Are you signing on as a financial or non-financial guarantor?Lenders usually ask the borrower to identify the guarantor as either a financial or non-financial guarantor. A non-financial guarantor is kept on the records and only acts as an alternate contact for the bank in case the primary applicant cannot be reached. However, unlike a financial guarantor, a non-financial guarantor is not held financially liable for any failure to repay the home loans on the part of the borrower
2. What obligations are you accepting as a guarantor?The obligation of a financial guarantor is usually limited to repaying the outstanding home loans along with any interest and late fees due, in case the lender fails to honor the debt. The law is also of the opinion that this should be stringently enforced, especially if the primary borrower is identified as a willful defaulter.
3. Does undersigning as a guarantor have any impact on your own loan eligibility?As far as lenders are concerned, the extent of your liability as a financial guarantor is equal to that of the primary borrower. Therefore, as far as credit histories are concerned, any defaults or late payments made against the mortgage by the primary borrower will have an impact on the guarantor’s credit score, making him or her look financially unstable.
4. What is the tenure of the home loan?Although it does not seem to have any direct co-relation with the guarantor, the term of the loan is important in the sense that the guarantor will remain liable till the loan is completely paid off. Once the loan is repaid in full, the guarantor will need to seek a no objections certificate (NOC) and a release of guarantor ship from the lender to complete the process.
5. Are you financially secure and aware of the terms of the loan as a guarantor?Although it might seem obvious, you as the guarantor need to be sure of your own financial standing before assuming the responsibility of being a guarantor in case of another person’s loan. You need to begin by assuming the worst and using that to figure out if you are capable of making the home loan EMI payments in case the borrower fails to make his. Moreover, you need to be completely aware of the terms and conditions outlined by the loan document so as to be on top of the situation at all times.

{Source: http://www.paisabazaar.com/home-loan/articles/9789-5-things-to-know-before-signing-on-as-a-home-loan-guarantor/}