our best friend has asked you to stand guarantor for his/ her home loan.
Naturally, you won't say no.
But wait! Despite how close you both are, you must give serious thought to a few issues before you consent.
Here are five questions you must ask before you agree.
1. Why are you being asked?
It could be for a reason that has no impact on the person's credit-worthiness. This means the home loan company is not questioning the individual's financial ability to repay the loan.
If that is so, it is pretty safe to be a guarantor.
Such situations arise when the applicant has a transferable job. Or he belongs to an industry like the software sector where he is likely to travel abroad on assignments. Or he resides in a city other than the one he is purchasing the home in.
If the reasons are other than these, think carefully before you commit yourself because the chances of default could be higher. Which means, you will have to repay the loan.
For instance, you may be asked to be a guarantor because the home loan company is unsure your friend can afford such a loan. Or, due to lack of qualifications and ability, they may doubt his capability to be re-employed (especially if s/he is self-employed).
2. Do you plan to look for a home loan in the future?
If no, you can breathe easy. If yes, here's what you should know.
When you stand guarantor for someone else's loan, all other home loan companiess will view it as you having taken a loan. They will deduct that amount when they calculate your loan eligibility.
Let's say you stand guarantor for a home where the Equated Monthly Installment is Rs 7,000. This is the amount you pay the home loan company every month when repaying your loan. Let's also say you earn Rs 20,000.
The loan company will immediate deduct Rs 7,000 and view your earnings as Rs 13,000. A loan amount will then be calculated based on your 'new' income (Rs 13,000 per month).
So your loan amount eligibility is reduced significantly and your capacity to borrow diminishes.
3. Do you fulfill the age limit?
Most home finance companies will not offer a loan to anyone younger than 23 years.
The maximum age limit is around 58 years and goes up to 65 years if the individual is self-employed.
The upper limit here does not mean you can take a loan at that age.
It means your entire loan must be repaid by that age. You cannot, thus, approach them at 56 and ask for a 10-year loan!
As a guarantor too, you will have to fulfill all these critera.
4. Do you match the income criteria?
The minimum income criteria varies from one housing finance company to another.
Some drop it to a gross annual income of Rs 1 lakh (Rs 100,000), while others may ask for the net annual income of a salaried applicant to be higher than Rs 150,000.
If you are self-employed, the income could be lower, at a minimum gross annual income of Rs 85,000 (though there might be other conditions such an having been in operation for a minimum number of years and generating profits).
Once again, you -- as guarantor -- will have to meet this criteria.
5. Are you willing to repay the loan?
The rationale behind having a guarantor is that it puts a moral obligation on the individual taking the loan to repay it.
Should s/he default for whatever reason, you, as the guarantor, have a legal obligation to pay up.
The loan is declared a non-performing asset if three consecutive EMIs are missed.
However, the company will not pounce on you. They will talk to the individual to see if s/he is facing a genuine problem. If s/he is avoiding them or they cannot reach him/her, they will ask you as a guarantor to talk to him/her.
Each company has their own recovery policy. The head of recoveries takes a call as to when the guarantor must take responsibility for the loan.
If you are more than willing to repay the loan (you will probably have to take a loan to do that), agree to be a guarantor.
Note: when you pay back the loan, you will not be entitled to any tax benefits because the home is not on your name. Only applicants of the home loan get a tax benefit. You don't.
If you are sure you want to do this; if standing guarantor still gives you the flexibility to get a loan for yourself, go ahead.
A final word
If you do become a guarantor, you will have to sign a guarantor's form. This binds you legally -- you cannot just walk out of the commitment during the duration of the loan.
You will need to get the borrower's approval so that s/he can scout around for another guarantor.
If this happens, you will be given a release letter saying you are no longer a guarantor.
When the loan is fully repaid, the guarantor documents will be returned to you.
