Things to know before signing on as a guarantor for a home loan

Obviously, mortgage lenders have a long list of conditions that borrowers must meet to be eligible for a loan. Sometimes there are cases where an individual borrower, even if he meets the eligibility criteria for the home loan, may ask the guarantor to sign the loan document. For more information on these cases and the risks for the guarantor.

Conditions that require a guarantee for a mortgage

Lenders generally ask the borrower for a mortgage guarantee in one or more of the following cases:

• When the loan amount exceeds the limit according to the bank’s guidelines
• When the borrower has a low credit rating
• When the borrower has a bad loan repayment/debt settlement history
• When the borrower is involved in high-risk jobs
• When the borrower is at an advanced age.
• If the borrower does not meet the minimum monthly income criteria

The main reason a bank asks the borrower to guarantee a home loan is to ensure that the loan will be repaid even if the principal applicant is behind.

Factors to consider before obtaining a loan guarantee

Before you commit to signing the loan document as a guarantor, you should ask yourself a few questions below. It is important to make an informed decision, as after signing the documents you are legally required to repay the loan if the borrower falls behind.

Do you join as a financial or non-financial guarantor?

Lenders generally require the borrower to identify the guarantor as a financial or non-financial guarantor. A non-financial guarantor is kept on the books and only serves as an alternate contact for the bank if the primary applicant cannot be contacted. However, unlike a financial guarantor, a non-financial guarantor is not financially responsible for a borrower’s failure to repay the mortgage loan.

What obligations do you accept as a guarantor?

A financial guarantor’s obligation is generally limited to paying off the outstanding mortgage loan, interest owed, and late fees in the event that the lender does not pay the debt. The law also believes that this must be strictly enforced, especially if the primary borrower is identified as wilful default.

How does registration as a guarantor affect your own solvency?

With respect to lenders, the scope of your responsibility as a financial guarantor corresponds to that of the main borrower. Therefore, any late payment or late payment made by the primary borrower will affect your creditworthiness.

How does the term of the mortgage affect you?

The term of the mortgage is important to the guarantor, as she remains responsible until the loan has been fully repaid. Once the loan has been paid in full, you will need to apply to the lender for a Certificate of No Objection (NOC) and release it from the guarantor to complete the process.

Are you financially secure and know the terms of the loan as a guarantor?

As a guarantor, you must guarantee your own financial situation before taking responsibility. You must be well prepared for the worst-case scenarios and have the ability to make EMI payments on time if the borrower fails. Also, you should be completely familiar with the conditions listed in the loan document so that you are always informed about the situation.

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