What is a Home Loan Guarantor and its importance in Home Loan Approval

Owning a home is not just about buying a property that is made of brick and mortar but is also about creating a space where you and your loved ones feel at pace, comfortable, and secure. More importantly, your home should also reflect your personality and identity. However, making the dream of being a homeowner come true can be challenging, and you may face financial difficulties. That is where home loans have emerged as the most viable solution to help you get the funds. 

When you approach any financial organisation for a home loan, you would know that they have certain eligibility requirements that you must meet. Sometimes, you may not be able to meet them all and need a guarantor. If you are wondering, "what is a guarantor for a home loan?", then the guide is just for you. Read on!

 

Role of a Guarantor in Home Loan

A guarantor is a person who agrees to sign the loan documents on your behalf and give the lender assurance that if you, as a primary home loan borrower, fail to repay the loan, they will settle the outstanding amount. From a lender's point of view, a home loan guarantor provides an additional layer of security for the money that they lend you. Also, by bringing in a guarantor, you can get home loan approval faster and without any hassles and get the loan at an affordable interest rate and more favourable repayment terms and conditions. 

 

Who can be the guarantor for your home loan?

You can ask any of your family members to sign as a home loan guarantor for you. Most lenders in India prefer the guarantor to be an immediate family member like a spouse, sibling, or spouse. One of the important prerequisites for the guarantor is that they must have a stable income and a good credit history. 

Sometimes, the lender may also require the guarantor to be the co-owner or full owner of the property you want to buy. 

 

When would you need a guarantee for a home loan?

Generally, when you apply for a home loan, the lender assesses your eligibility criteria. If you meet all their requirements in terms of ability to repay, high credit score, stable job/business, etc., the lender sanctions the loan. 

Sometimes, the lender may ask you to bring in a guarantor under the following circumstances:

• When you apply for a high loan amount but the lender feels that you don't have the financial means to repay the amount on time. 
• When your credit score is low or does not meet the lender's minimum credit score requirements. From a lender's perspective, a low credit score is a reflection of your poor credit behaviour. You would need an additional guarantee for their money and ask for a guarantor. 
• If you do not meet the lender-specific age limit criteria.
• If you don’t have a stable income source or are involved in a high-risk occupation. 

 

Things to consider before becoming a Home Loan Guarantor

If you are considering becoming a home loan guarantor for your family member or friend, here are a few important things you must take into account before you sign as a guarantor:

• First and foremost, assess your financial situation carefully. You must have a good and stable income, a high credit score, and the ability to manage all your financial responsibilities. The lender will scrutinise your financial health to determine your eligibility and capacity to repay the loan if required. 
• Before signing any loan-related documents, ensure you fully understand the legal implications of being a guarantor. By agreeing to be a home loan guarantor, you not only offer support to the borrower but also take financial risk. So, being aware of the consequences, including legal action and damage to your finances and credit profile, is paramount.
• Evaluate your relationship with the primary borrower. Do they have the necessary financial capacity to repay the loan as per the agreed terms and conditions? It is advisable to have clear communication with the borrower about their expectations from you, the responsibilities you need to carry out, and whether they have any contingency plan.
• If you want to withdraw from being a guarantor, it is always wise to have a strong and comprehensive exit strategy in place. This could involve refinancing the home loan to a new lender, finding an alternative guarantor, transferring the responsibility, etc. 

 

Conclusion

A guarantor for a home loan helps both the borrower and the lender. The guarantor helps borrowers get the desired loan amount by agreeing to share the repayment responsibility. For lenders, the guarantors provide the assurance/security that they can recover the amount they lend. 

If you are the borrower, make sure that you choose the guarantor carefully. It must be a person whom you trust fully and share a good relationship with. Remember, they agree to share the repayment responsibility on your behalf. So, make sure that you make the monthly payments on time throughout the loan tenure or until you fully repay the loan. That is the way to a healthy relationship between you two. 

If you are signing as a guarantor for a family member or friend, understand the legal obligations and your financial situation and make an informed decision accordingly.