Tips for becoming a co-applicant in home loan

Ravindra Rao

A home is the most popular, and will be the most enduring of all earthly establishments, said the late great American magician, Channing Pollock, about his abode.

A home is perhaps the most prized possession for most of us and aspirational in every sense; the best address, important neighbours and all facilities that we would ever need in life. That costs a small fortune in many Indian cities but if you have a robust source of income and an impressive credit score, such dreams can be realised without much strain. However, for those who do not fulfil the income criteria for a substantial loan, a simple way to hone your overall financial prowess is to borrow jointly with your spouse or someone who can be designated as a co-borrower. Let’s understand the basics of this advantageous concept.

Who can be a co-borrower

A co-borrower can be an immediate family member, salaried or self-employed, who is an Indian or even an NRI. Depending on their discretion, lending institutions can allow up to six co-applicants which may include spouse, siblings and blood relatives like parents.

Nevertheless, married couples get the highest preference as banks even assign a longer loan repayment tenure subject to the retirement age of the older applicant.

Benefits of a joint home loan account

Prospects of a bigger loan at a better rate brighten when an applicant adds co-applicants with a good credit score and an independent income source. It helps lenders consider the joint income of the applicants to assess their repayment capacity. But banks may insist that all co-owners of the property must be the co-applicants as well.

Lower financial burden on family

A joint home loan bestows tax deduction benefits for both co-applicants separately, provided they are co-owners of the property and each of them is contributing to the home loan repayment. As per existing provisions, principal repayments are eligible for deduction under Section 80C of the Income Tax Act for up to a maximum limit of Rs 1.50 lakh. In the case of interest payments, there is a tax deduction available under Section 24 up to Rs 2 lakh if the property is self-occupied (If the property is let out, then the entire interest becomes eligible for tax deduction). For a joint home loan, this takes the combined limit to Rs 3 lakh under Section 80C and Rs 4 lakh under Section 24(b) – which helps reduce a significant burden on the family.

Advantage for married applicants

Few important tips can enhance the overall benefit to married applicants. A couple must mutually work out the ownership share between themselves as co-borrowers to optimise tax benefits; either this can be in the ratio of 50:50 for claiming deductions in equal proportion or 60:40 or 70:30 depending on which co-borrower falls into what tax bracket – if he or she has a higher income, a bigger share of the property can help avail greater benefits. The actual amount of tax benefit given to each co-applicant would be in proportion to their contribution in repayment of principal and interest.

Thus, it is even possible for co-applicants to decide how much tax benefit they would want, and at what proportion, each applicant would pay. In case of a woman applicant, many lenders would provide a differentiated interest rate - usually a few basis points below the normal home loan rates. For this, the applicant must be the sole or joint owner of the property and an applicant or co-applicant for the home loan.

Joint home loan applicants can make payments from a single or joint account by way of cheques or ECS. Some institutions even allow co-borrowers to share the number of EMIs between them, depending on which they could decide the number of EMI cheques to be issued by each applicant. One borrower can pay all instalments while the other can refund his or her share by way of cheque or fund transfer to that account.

Reward for good credit score 

A key factor that decides one’s loan eligibility is the credit worthiness of borrowers. When one applies for a loan or credit, a lender seeks the individual’s credit risk, evaluated by a credit score maintained by agencies. A credit report is the holistic sum of the applicant’s financial dealings in every sphere of life, interpreted as a number that is critical for getting not just loans or other means of credit, but even to qualify for them (banks can judge not just the applicant’s primary eligibility but even his/her ability and propensity to repay). It is prudent to keep a check on the credit report/credit score of an applicant as well as a co-applicant; as lower scores could impact one’s chances of obtaining finance for a home.

Documents required for joint loan

Besides home loan documents, individual details such as KYC (proof of identity and address), income and property documents are required to avail the housing loan. Detailed documentation helps a lender to decide faster and beneficially in your favour. Income documents can be supported by other assets created by the applicants to show their prudent financial behaviour. Though there would be multiple borrowers, the documentation process for joint home loans remains much like that of individual home loans. Despite its enormous benefits, one may avoid applying for a joint home loan if the credit score of the co-owner is low due to a poor credit history or if he/she is already repaying an ongoing loan that has consumed maximum loan eligibility or if he/she is intending to buy a bigger property in the future for self-occupancy or if he/she is about to retire.

Managing loan and finances

A joint home loan is not only about saving in terms of principal and interest payment to a great extent, but also about sharing an honorable and real responsibility towards a home. Many couples would agree that such a joint move has instilled a sense of discipline – especially financial prudence – in them where both partners feel proud for contributing towards mutual benefit. Yet, one must not take hasty decisions in terms of finalising a house or taking a huge loan (it may turn out expensive over the tenure with fewer benefits). Couples must undertake basic financial planning before committing to a huge monthly payout which may hamstring regular needs or individual desire to acquire something personal. As TS Elliot said, “Home is where one starts from.” Home loan is where one could learn much from – as co-borrowers.

The writer is Chief Executive Officer, Grihashakti – Fullerton India Home Finance Company Limited. The views expressed in this article are his own