Buying a home can be a very complex and difficult process, and especially so if you are intending to take a home loan. It can be very difficult for applicants to persuade the bank to sanction a loan of the required amount.Often, the amount approved falls short of the required amount and the borrower has to literally run from pillar to post trying to raise the deficit amount from other sources. If they are unsuccessful, it can mean that they are not able to buy their dream house. In such a situation, it helps to add to a co-borrower to increase the loan eligibility amount. It can also help you to share the total debt burden.
Who Can Be the Co-Borrowers?
There are a number of restrictions on who can be a co-borrower for a home loan. There can be a maximum of six individuals involved in the co-borrowing arrangement. You simply cannot join hands with just about anyone to become a co-borrower. Typically co-borrowing is allowed only with the spouse, parents or siblings of the principal applicant. The ideal arrangement is one between spouses, who can take the loan jointly even if they do not own the property together. In case, the co-borrower is the child of the applicant, banks may insist that the primary owner of the property has to be the child. However, if the father has more than one child, the banks can ask for the father to the property’s primary owner.
If the co-borrower is the daughter and is unmarried, the daughter should be the owner of the property to avoid any disputes after her marriage. If the co-borrowers are the son and the daughter, after marriage the daughter may have to surrender her claim on the property. Married daughters are also not permitted to be co-borrowers. Similarly, brothers and sisters or two sisters may not be co-borrowers as also unmarried partners and friends. Banks may allow brothers to be co-borrowers if they are also joint owners of the property.
How Is Co-Borrowing Beneficial?
By resorting to co-borrowing, you can increase the amount of loan that you are eligible for. Banks take your income level to decide on how much you can afford to pay as the EMI and this, in turn, dictates the amount of loan. The amount of the EMI depends on the amount of the principal, the loan tenure, and the housing loan interest rates applicable. In case, the amount that the bank is willing to sanction is less than the amount you want, then by inducting one or more co-borrowers you can increase the income and qualify for an enhanced loan amount.
Co-borrowing also helps in case your CIBIL score is less than the cut-off mark decided by the bank. However, this will only work if the CIBIL scores of your co-borrowers are higher than yours and the average score of all the co-borrowers is more than that required by the bank. Also, the higher the average CIBIL score, the better is your chance of getting a higher loan amount.
According to the income tax rules, those who take housing loans are eligible to claim tax deductions; Rs.1, 50,000 for repayment of the principal, and Rs.200, 000for payment of the interest, per year. When there are two or more co-borrowers, each of them is allowed to claim their deductions while filing their returns. When the loan amount is high, the repayment of the principal and the interest will exceed the limits laid down by the IT department for a single borrower but when there are multiple borrowers, all of them can save tax, subject to their own individual limits, but for their share of the principal amount and interest thereon.
The Disadvantages of Co-Borrowing
All co-borrowers are severally and individually liable to repay the loan amount. It does not matter if one or more co-borrowers are unable to pay their shares as that is taken to be purely internal arrangement. Whatever is outstanding can be recovered from the borrowers who have the wherewithal to pay. Thus the role of a co-borrower is also in the nature of a guarantor of the loan. It also needs to be appreciated that if the loan payment is delayed or defaulted, the credit scores of all the borrowers will be negatively affected. When the number of borrowers is more than one there is always a chance of disputes arising, which unless settled amicably, can mean lots of time, effort, and expenses in legal proceedings.
Co-borrowing can be of immense help when the main applicant is unable to access a loan of the required amount by himself. However, it must be realized by all parties that by becoming co-borrowers they are individually responsible for repaying the loan in case the others default.