For a home loan, an individual’s ability to get a loan is limited by his income and credit score. But when he pairs with another individual such as a parent, child, spouse or sibling, together they can together raise a higher loan limit.
Who can co-borrow
Husbands and wives are the most commonly seen combination for co-borrowing. Fathers and sons can co-borrow but in case of a loan taken between a father with more than one son, the father will have to be the owner of the property. Between a father and unmarried daughter, the daughter needs to be the owner to avoid post-marriage disputes. Between a father, son and daughter, the daughter may have to relinquish her claim on the property.
Brothers can jointly apply if they are living together and intend to continue living together. But brothers and sisters, or sister and sister, cannot be co-applicants—nor can a minor be a co-applicant. Also, parents can’t co-apply with a married daughter. If the co-borrowers are parent and child, the banks usually do not allow a tenure overlapping the post-retirement phase of the parent.
How does it help
Co-borrowing helps increase your loan eligibility. Suppose your income allows you to take a loan of R70 lakh, but your loan requirement is R1 crore. Here, a co-borrower could stretch his eligibility to take a bigger loan. In a co-borrowed loan, the repayment capabilities of all applicants are considered collectively to determine the maximum loan eligibility. If one applicant is falling short of the eligibility, a co-borrower could improve their chances of getting the loan. Similarly, if a person has a credit score lower than the bank’s requirements, a co-borrower could improve their chances of getting a loan.
When a home loan is co-borrowed, each borrower is eligible for tax benefits under Section 24 for payment of the interest and for payment of the principal under Section 80(C). The tax benefit is allowed in the proportion as per mentioned share of each applicant in the loan agreement, provided the co-borrowers are also the co-owners of the property. The tax benefits are allowed only once the possession of the property has been passed on to the buyer.
Be aware of the terms and conditions of joint borrowing before you sign a loan agreement. In a situation where a co-borrower is not able to repay his or her share of the equated monthly instalments (EMIs), the lender may reserve the right to recover the money from the co-borrower. The co-borrower also acts as a guarantor, therefore a default by one borrower could damage the creditworthiness of the other. Another problem that may crop up is when there’s a dispute among the co-borrowers, especially in the absence of a will and if there are too many legal heirs with claim on a property.
The author is CEO, BankBazaar.com