Are You A Home Loan Guarantor? Be Careful
Anil Sharma, a 45-year-old supervisor in a manufacturing firm, did not expect to run into trouble when he became a 'Home Loan Guarantor” to one of his close friends. When his friend defaulted on the loan, the bank interrogated him and insisted that he guarantees the loan extended to his friend. Anil ended up risking the personal equity and credibility of himself and his family.
'A friend in need is a friend in deed' is a worldview that may get you into trouble if you are not cautious in your financial dealings.
MakaanIQ tells you more about the perils of being a home loan guarantor.
Anil had never applied for a loan himself. He had always paid his credit card dues diligently. But he was shocked when he saw his credit report. His Credit Information Bureau India Limited (CIBIL) score was 550, and this had nothing to do with his own credit behaviour. His friend had not paid his Equated Monthly Instalments (EMIs) on time.
You may be wondering how his friend defaulting on the EMI payments can have any bearing on Anil Sharma's credit score.
This is so, because once you agree to become the guarantor to an applicant's home loan, you are answerable if the applicant is not punctual with his EMI payments. This will have a direct impact on your credibility and credit score. Such loans are not technically yours, but they are legally yours.
Banks and financial institutions send the credit records of home loan applicants to credit agencies every month. So, any fluctuation in the EMI payments of the applicant will influence the credit score of his guarantor as well. In other words, the guarantor's credit report will reflect the loan he pledged to repay on behalf of another person.
Are we saying that you should never guarantee a loan?
No! We are not saying that you should never help a friend in need.
Home loan credit officers ask for two types of guarantees. Financial and Non-financial. Home loan credit officers ask for a non-financial guarantee when the home loan applicant is not always available. For example, if his is a Non-Resident Indians (NRIs) he may not always be available. If a home loan borrower defaults on EMI payments, this does not affect the personal net-worth of non-financial guarantors. You can always choose to be a non-financial guarantor to a friend in need.
But if your salary slips or financial statements - as the case may be - have been examined, you have reasons to worry. You must show more prudence in such matters.
Does guarantors become less eligible for fresh loans?
If you are a non-financial guarantor, this will not have any effect on your eligibility for a fresh home loan.
But if you are a financial guarantor, this will have an impact on your eligibility!
Let us understand this with an example.
Let us suppose you are a financial guarantor to a primary home loan borrower who has a borrowed Rs 1 crore from a bank. When you apply for a fresh home loan, the bank will lower your eligibility by the exact amount of EMI the primary home loan borrower pays. Your Fixed-Obligation-to-Income ratio (FOIR) will be calculated by taking this into account.
Do not assume that you can wash your hands off the home loan you guaranteed. This will appear in your credit report.
What happens to a guaranteed loan if the primary home loan borrower dies?
If the primary home loan borrower unexpectedly dies, if the home loan is not insured, the guarantor's savings and personal assets are attached to compensate for the unpaid amount of loan and foreclose it.
Quick tip for being a financial guarantor
If you want to be a financial guarantor to a home loan borrower, make sure that the applicant has a home loan insurance policy. Home loan insurance policy is linked to home loan EMI payments to safeguard the bank's funds. You can also insist that the home loan applicant gives some secondary collateral along with primary security.
Related Article: Buying A Home Loan Insurance? Here Are Some Must-Know Facts