While applying for a home loan, you may get engaged as a co-borrower, co-owner, co-signer or co-applicant. It is important to understand the significance of each role as it can have severe repercussions on your obligation towards the loan. Here is an explanation of these terms.
Applying for a loan as a co-borrower
“It refers to any individual, who along with the primary borrower, plays a critical role of accepting responsibility for repaying the debt, in case the primary borrower fails. A co-borrower applies for a loan along with the primary borrower and both bear the legal responsibility of repayment. It isn’t necessary for him to be co-owner of the property and thus, he may not enjoy tax benefits” says Amit B Wadhwani, Co-Founder, SECCPL.
When applying for a loan as co-borrower, remember:
- Co-owner cannot be a minor.
- Co-borrowers are married couple or immediate relative.
- Co-borrower must have a consistent source of income
- On death or payment default by the primary borrower, the co-borrower becomes responsible for the repayment of the home loan.
Applying for a loan as a co-owner
“As the name suggests, the co-owner has a legal share in the property along with the main borrower. Most banks/financial institutions/housing finance companies, insist on the co-owners becoming co-borrowers along with the main borrower. Hence, all co-owners are necessarily co-applicants to the home loan application, along with the main borrower but all the co-applicants may not be the co-owners of the property”, explains Yogesh Pirthani – Associate Partner, Economic Laws Practice (ELP).
Co-signing the loan
A co-signer signs the home loan application along with the primary borrower, mainly when the principal borrower lacks a good credit rating. A co-signer neither has any right, title or interest in the property for which the loan is being used for, nor is he entitled to the right to use the loan amount as such directly. The co-signer is equally responsible for the loan even when not responsible for the EMI payments.
Applying for a loan as co-applicant
Co-applicants have a shared responsibility towards repaying a loan. Banks insist that all co-owners be co-applicants but the reverse needn’t apply. Thus, the onus lies with the co-applicants to protect their interests if they are contributing to repaying a loan. “In cases where the co-applicant is not the co-owner, failing to repay the loan, will take away their rights over the property. In some cases, a co-applicant may be a party to a home loan, to meet the bank’s eligibility criteria”, adds Wadhwani.
Before participating in a loan by playing any of the above mentioned roles, know your responsibilities and accountabilities beforehand. Sign any document after consulting a legal expert.
|5 points to keep in mind|
– Being a co-signer may reduce the credit eligibility of the person and may impact approval of any future credit requirement of co-signer.
– The legal liabilities of a co-owner are same as that of a main borrower.
– A co-applicant who is not a co-owner, is not entitled to tax benefits on home loans.
– The liability of the co-signer under the home loan arises only when the main borrower commits a default in payment.
– Co-signing a loan becomes a part of co-signer’s credit record, impacting his/her CIBIL score.