What Should You Know Before Being a Home Loan Guarantor?
When people apply for a home loan, in some cases, a third party guarantee is sought by the lender before the loan is sanctioned. In such cases, another individual act as a guarantor for the loan. When looking for guarantors, borrowers usually approach their relatives or friends to act as a guarantor. Though the guarantor does not have to repay the loan every month, there are some things which should be considered before you act as a guarantor for someone else’s home loan. These things include the following –
What it means to be a guarantor
Though, as a guarantor, you would not have the liability to repay the loan every month, there would be a liability if the borrower defaults on the loan. In case of a default when repayments are not done for consecutive months, the lenders notify the guarantor to make the payment for the loan. This is because of the fact that when you act as a guarantor, you promise to pay the loan on behalf of the borrower in case of defaults. So, if the borrower defaults, you would ultimately get the burden of loan repayment even though the house might not be yours. Moreover, if the borrower dies and there is no mortgage redemption insurance policy affected with the home loan, the outstanding balance of the loan would have to be paid by you.
Your loan eligibility would be affected
Acting as a guarantor, in effect, means acting as the borrower of the loan. When you become a guarantor, your loan eligibility reduces. The loan is considered to be your liability which reduces your disposable income. As such, when you apply for a loan yourself, the amount of loan which you can avail would be limited if you are an acting guarantor for another loan.
Your credit score would be affected
Acting as a guarantor would also affect your credit score. In fact, there is a two-fold effect on your credit score when you become a guarantor. One, your credit utilization ratio increases as the loan is considered to be your liability too. Moreover, since the home loan would be of a considerable amount, your credit utilization would also increase considerably. As the credit utilization ratio increases, your credit score reduces. Two, if there is a default on the part of the borrower your credit score would also be affected. Any default on the home loan would reduce your credit score too.
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Home loans are for longer durations
Home loans are of a considerable amount and the repayment tenure can be as high as up to 30 years. When you become the guarantor of the loan, you would have to act as such till the completion of the repayment tenure. Since home loan tenures are long, you would be tied up with the loan obligation for a longer period of time.
So, before you consider becoming a guarantor for a home loan, keep these points in mind. Become a guarantor only if you wouldn’t be availing a loan yourself anytime in the near future and only after considering the above-mentioned points.
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