When it comes to home loans, we often use the terms like co-applicant, co-borrower, co-signer, and co-owner interchangeably.
That is wrong.
These are not one & the same and their rights & obligations differ. Let us first understand co-signer meaning and then move on to the role played by the co-applicant and co-owner.
Who Exactly is a Co-Signer and What is Their Role?
You can understand the role of the co-signer more like a guarantor. The guarantor does not have any liability in a home loan, but should the primary borrower default, then it does become your liability to repay the home loan. For the bank, having a so-signer is like having a guarantor and gives them the required comfort.
It must be understood that the co-signer does not share the responsibility of EMI payment, but would come in as a knight in shining armour to rescue the bank by taking over the liability if the primary borrower defaults.
Is being a co-signer a liability? Yes, it is a contingent liability. Also, one must remember that when you become co-signer, your name and PAN is registered in the bank records and it impacts your CIBIL score.
What Is Co-Borrower or Co-Applicant?
Incidentally, co-applicant and co-borrower are one and the same thing. Unlike in the case of co-signer, the co-borrower/co-applicant is equally responsible for the EMIs on a home loan.
The co-applicant is normally the spouse of the home loan applicant. In case of the applicant having a relatively lower credit score, adding a co-applicant enhances the loan eligibility. Also, it would ensure longer tenures and lower rates of interest.
Have a co-applicant only if your rating is low or the co-applicant is able to add value. The co-applicant has equal liability in the home loan and it shows in their CIBIL score as a liability. Any disruption in servicing these loans impacts the credit scores of both applicants.
An important thing to note is that you can be the co-applicant, without being the co-owner.
Who Then is the Co-Owner of the Property?
The co-owner is part owner of the property. Normally, when you are adding your spouse as the co-applicant, the banks insist that they should also be the co-owner so that the equity is also shared in the property along with liabilities.
In many cases, the presence of a women co-applicant enables the borrower to get concessional rates of interest. In such cases, the bank will offer concessional rate only if the co-applicant is also the co-owner of the property. When there is a co-owner, both have equal share in the property and are also registered as co-owners.
If co-applicant is also the co-owner with legal share, then they can also avail tax benefits. Remember, you cannot avail tax benefits unless you are also the co-owner of the property.
Generally, co-owners and co-applicants are the spouses while the co-signer can either be a family member or a friend with creditworthy track record. This is not a rule though.
Benefits of Having a Co-Borrower in the Home Loan
Here are some of the major benefits that accrue to the borrower from having a co-applicant/co-borrower for the loan.
- When two people become co-applicants for the loan, it increases the overall eligibility for the loan. Especially, if your co-applicant or co-borrower also has solid stable income and a good credit score, then they can increase you loan eligibility to a great extent. Financial institutions and banks insist on a co-applicant to spread their lending risks.
- Often loan applications get rejected. There could be reasons like technical problems in the application, low credit score, inadequate income levels, too many liabilities etc. In such cases, it may be a good idea to bring in a co-borrower or co-applicant with a solid income who can make you loan-eligible and also facilitate higher loan limits. That lets you scale up the property choice; since combined repayment capacity is considered.
- Apart from making you eligible for higher loan limits, having a co-applicant also ensures that you can get loans at lower rates of interest. Normally, if your credit score is low, the bank may ask you to pay a slightly higher rate of interest. To avoid that, you can impute a co-borrower with a good credit standing so that you not only get a higher loan eligibility but also a lower rate of interest and even longer tenure.
- Finally, there is the all-important consideration of higher tax benefits. For example, today, the limit of interest that one person can claim is just Rs. 2 lakhs per annum, which is quite small for the kind of housing costs in India. By making the co-applicant also as co-owner, both the individual and the spouse can claim Rs. 2 lakh each as interest per year, subject to the EMI having such a large interest component.
In a cyclical world, having a co-borrower is a good risk management method for the bank also. In the process, the co-applicant ensures higher loan eligibility too.