Co-Applying For A Home Loan? What You Need To Know About Benefits And Risks

To boost your eligibility for a home loan, there are some strategies you can adopt. One of these is to apply for a home loan with a co-applicant

The co-applicant is responsible for repayment of the loan with the primary borrower and has access to the loan funds.

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Home loans are a popular way to finance your homeownership dreams. The loan is usually secured against the property itself and makes the purchase affordable by spreading its cost over a tenure of 15-20 years. To be eligible for a home loan, you must satisfy the lender’s eligibility criteria. This may sometimes be challenging to fulfil due to reasons out of your control. In such cases, the lender may either reject your loan or offer you one at a higher interest rate, both of which are undesirable scenarios.

To boost your eligibility for a home loan, there are some strategies you can adopt. One of these is to apply for a home loan with a co-applicant. But who can be a co-applicant and what are the benefits of having one for your home loan? Let’s find out.

What Is a Co-applicant?

A co-applicant is an individual who jointly applies for a loan with a primary borrower to enhance the latter’s loan eligibility. The co-applicant is responsible for repayment of the loan with the primary borrower and has access to the loan funds. They may also have ownership of the property being purchased. Thus, the financial profile of a co-applicant must be strong to boost the overall loan eligibility.

Who Can Be a Co-applicant?

Lenders have specific guidelines regarding who can qualify as a co-applicant. Typically, family members are permitted to act as co-applicants, and their income is factored into the calculation of loan eligibility. Here, "family members" refers to close relatives related by blood or marriage, not extended relatives or friends. Let’s take a look at some accepted applicant and co-applicant relationships: 

• Husband and wife: A husband can apply for a home loan with his wife as the co-applicant. If the wife earns an income, it will be factored into the loan eligibility. As a co-applicant, the wife will also be entitled to certain tax benefits.
• Father and son: If the son is the only child, his father can serve as a co-applicant on the loan. However, the incomes of the father and son will be considered and the property must be jointly registered in both their names as well.
• Unmarried daughter and father: An unmarried daughter can apply for a home loan with her father as the co-applicant. The father’s income is however excluded from eligibility calculations to prevent legal issues once the daughter marries.
• Brothers and sisters: A brother can become a co-applicant in a loan if he lives with the primary applicant and intends to continue doing so in the new property. But, a brother who is the primary applicant for a loan cannot choose his sister as a co-applicant. Also, a female applicant cannot choose her sister as a co-applicant for a home loan.
• Minors: Minors cannot serve as co-applicants for home loans.

Benefits of Having a Co-applicant

• Enhanced loan eligibility - Having a co-applicant is an ideal way to boost your loan eligibility. This is because lenders assess your income when reviewing your loan application. With a co-applicant, your overall income goes up. As a result, your loan amount may also increase, allowing you to purchase a more expensive property

• Improved creditworthiness – Credit history is another important factor considered by lenders for loan applications. Having a co-applicant with a healthy credit score can improve your application. As a result, the lender may be more likely to approve your loan given that their risk is now distributed between two applicants. This may also lead to the lender offering you favourable terms and low rates on your preferred loan
  
  
• Shared financial burden - One of the biggest upsides of having a co-applicant is sharing the debt burden. Since both applicants are responsible for the repayment, it can help reduce the EMI for each applicant. As a result, servicing the loan becomes more manageable for both borrowers and can be done without straining finances.

• Tax benefits - Under Section 80C of the Income Tax Act, the primary and co-applicant in a home loan are eligible for tax benefits. The rules currently allow each borrower to claim a deduction of up to Rs.1.5 lakh on the principal repayment (Sec 80C), and a further deduction of up to Rs.2 lakh towards interest paid (Sec 24(b)). These two deductions can significantly reduce the tax liability for both borrowers.
  
  
• Special rates for women borrowers - Some banks offer special or discounted rates to women applicants on home loans. These rates are typically a few basis points lower than the regular rate and can result in significant savings on the loan in the long run. To avail of this, the woman must be an applicant or a co-applicant of the home loan.

• Longer tenure – Some lenders may be open to extending the tenure of the loan if one of the co-applicants is younger. A longer tenure can lower monthly EMIs and make the loan more affordable. However, it can drive up the overall interest payments.

 Key Points to Remember 

• Joint liability -The applicant and co-applicant are jointly liable to repay the loan. In case one borrower defaults on the payment, the other borrower must make up for the missed payment. Also, joint liability can impact the creditworthiness of both borrowers. So if one borrower misses a payment, both borrowers’ credit scores will be impacted.

• Legal and financial rights - In case of a joint loan with a co-applicant, the primary and co-applicant have legal rights over the purchased property. Moreover, both parties, whether spouses or not, must agree on the ownership and repayment of the loan in advance to avoid future disagreements.

Choosing a co-applicant must be done carefully for it can have implications on your loan and your financial health. Make sure you settle the terms of loan repayment with your co-applicant at the start of the loan-term to avoid any confusion and ensure that you are well on your way to achieving your homeownership dream.

The author is the manager, communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.