It is important to understand whether one should apply for a home loan with a co-applicant or as the sole applicant.
Co-applicants can separately enjoy these tax benefits, given that they are also the co-owner of the property in question.
The post-pandemic boom in the home purchase sentiment is being further fuelled by subsidies under the PMAY scheme. The decision to buy a home today seems more prudent in light of competitive developer pricing and favourable home interest rates.
Against this backdrop, it is important to understand whether one should apply for a home loan with a co-applicant or as the sole applicant.
What is a co-applicant?
A co-applicant is a person who shares the responsibility of shouldering the home loan beside the primary applicant. The presence of a co-applicant is usually preferred by lenders because in the case the primary applicant is unable to repay the loan, the accountability shifts to the co-applicant.
From the POV of a borrower, applying with a co-applicant can ease the process of loan approval and yield better loan terms. Some lenders even allow up to six co-applicants for a loan. Lenders favour certain kinds of relationships between applicants. These are father and son, unmarried daughter and father, unmarried daughter and mother, brothers, and husband and wife.
Here’s looking at some of the advantages that loan applicants enjoy with a co-applicant in the borrowing equation.
The benefits of having a co-applicant
1. Higher loan eligibility
Borrowers often have trouble getting approved for a home loan because they don’t meet the eligibility criteria. These include minimum income, credit score, debt to income ratio, etc. Adding a creditworthy co-applicant with a good credit score can improve the eligibility of such borrowers, even enabling them to access a larger loan. The only caveat is that your and the co-applicant’s debt-to-income ratio should not exceed 50-60%. Failing to meet these conditions will either lead to your loan being rejected or you may have to pay a higher interest rate.
2. Perks for female co-owners
A woman co-applicant is eligible for differentiated interest rates. These interest rates are typically lower than the standard rates supplied by most lenders. To receive these benefits, however, the co-applicant must either be the owner or joint owner of the concerned property. She must also be the co-applicant or the primary applicant of the loan; i.e., her income must be involved in the credit assessment process.
3. Tax benefits
Section 80C and 24b of the Income Tax Act offer some tax benefits to borrowers on home loans. Co-owners, who are also co-applicants in the loan, are eligible for deduction of up to Rs 2,00,000 for interest on the home loan every year under Section 24b. They can also claim a maximum deduction of Rs 1.5 lakh a year on the principal repaid under Section 80C. Co-applicants can separately enjoy these tax benefits, given that they are also the co-owner of the property in question.
The potential pitfalls of having a co-applicant
Besides the aforementioned benefits that a borrower can tap into with a co-applicant by their side, there are also some downsides to it, explained as follows:
1. Death or separation of co-applicants
In case of death, the remaining applicant may not be entitled to the entire share of the property. If the applicant has died without a proper will, the property may be split among the co-applicant and relatives of the deceased. In case of divorce between co-applicants, if a co-applicant refuses to repay the home loan, the onus of repayment falls on other applicant.
2. Credit scores and subsequent eligibility
Another thing borrowers must keep in mind is that if a co-applicant refuses to pay their EMI, the credit score of all the applicants involved will be affected equally. This will lead to a proportional drop in eligibility while applying for a loan in the future.
To have or not to have a co-applicant?
It depends on the situation at hand whether you opt to apply for a loan singly or with a co-applicant. While the latter option is more preferable as it can give you better terms, co-applicants should be carefully selected and viewed as a liability, to be on the safer side of things. The loan process is taxing and so are the responsibilities and accountabilities associated with it. Therefore, the co-applicant must be of the same calibre as the primary applicant when it comes to creditworthiness for the lender to accept their application for a home loan. Going through all these considerations will equip you to take a prudent decision as you take the big step towards owning your dream home.
(By Saurabh Garg, Co-founder & Chief Business Officer of NoBroker.com)