In India, buying a home is mostly the single largest investment made by an individual during their lifetime. As our families expand, we plan for the future and plan to invest in bigger homes that can comfortably accommodate and protect a growing family. However, such dream houses come at a significant cost, warrant access to huge funds, and hence, require key financial planning.
In most cases, individuals need to opt for home loans to fulfil the cost obligation associated with buying a house. Considering the amount and type of loan taken, there are certain eligibility criteria that one needs to be aware of before initiating applications.
At the time of taking a home loan, your lender or you may wish to add another applicant, also called co-applicant, to your home loans for various reasons and the structure of having a co-applicant is referred to as a joint home loan.
Let’s understand when and why should you take a joint home loan.
Role of a Co-applicant in a Joint Home Loan
A lender while considering applications simply wants to check if the borrower can repay the home loan along with their household expenses and existing loans. Therefore, while calculating your eligibility they generally keep aside a certain fixed portion of your income that covers your existing expenses. An individual’s eligibility is decided on the basis of the discretionary amount left post calculating their interest repayments and monthly instalments.
In a joint home loan, you can add another co-applicant or applicants who becomes liable to pay the home loan along with the primary applicant. Liability of the loan is a collective responsibility on both or all the co-applicants as well. Generally, immediate family members, including father, mother, spouse, children, and brother, are most eligible to become co-applicants in joint home loans.
With such arrangements the question that mostly arises is whether the co-applicant is also the co-owner of the home being considered. Co-applicant or co-applicants may or may not be the co-owner of the property, however they have a liability to pay back the loan. The co-owner of the property is a joint owner along with other owners.
As a safeguard and prudent underwriting practice, lenders ask all co-owners to also become co-applicants in home loans, however, the reverse need not be true. This is a decision the pros and cons of which should be carefully considered by the primary applicant while choosing joint home loans.
Why Choose a Joint Home Loan Over Any Other Loan
There are a number of additional advantages in considering taking a joint home loan as compared to an individual home loan. These include higher loan amount eligibility, lower interest rates and other income tax benefits.
Higher Loan Amount Eligibility: When you add an income-earning co-applicant to a loan, the lender considers the income level of all the applicants and calculates an eligibility amount higher than that of only one individual applying for a home loan. This allows applicants or families to take a larger home loan amount or purchase a more aspirational home since the room for increasing an applicant budget is possible.
Lower Interest Rates: In order to avail lower interest rates individuals can add their spouses or mother as co-applicants for a joint home loan and as a joint property owner. This is useful as most lenders in India offer a lower rate of interest to women borrowers. It is up to 10 to 25 basis points lower than the interest rate for male borrowers.
Tax Benefits: Tax benefits can be enjoyed by all the co-applicants separately. For this to happen, co-applicants should be property owners as well and should contribute to the payment of monthly instalments towards the repayment of the home loan.
Income Tax benefits that are available to the all co-applicants include:
- Benefit under Section 80 C of the Income-Tax Act for the loan’s principal payment up to a maximum limit of INR 1.50 lakh per year.
- Benefits under Section 24 of the Income-Tax Act for interest paid on a home loan up to INR 2 lakh per year.
- In a joint home loan, both the applicants can claim the above amounts individually and use this as an effective tax planning tool
Co-applicants and first-time loan applicants can utilise the joint home loan as a great tool to improve their credit score, thereby easing the process for future loan applications as and when required for various other purposes.
Necessary Documents Needed for a Joint Home Loan
Documentation is the most cumbersome and tiring part of taking any loan. However, it is a critical part of any lender’s operations as they would want to make sure that their borrower meets income eligibility and supporting documents are provided.
There are a number of regulatory guidelines for the know your customer (KYC) and property-related documents, where it is imperative that all accurate documentation is shared to avoid unnecessary rejections and thereby delaying the availability of funds.
For any home loan, typically an applicant needs to provide the following: –
- KYC documents which include:
- Identity Proof
- Address Proof
- Income proof documents including but not limited to:
- Salary slips, Form 16 issued by your employer or
- Income tax returns (especially for self-employed) of the last three years
- Property related documents such as:
- Agreement to sell, a sale deed or a registry
- Previous sale deed for the property (typically all transactions done on that property in the last 13 years)
- Few property or location-specific documents like a no-objection certificate (NOC) from relevant authorities or from your bank if the project is funded by any financer in case you are buying new property from a builder.
All applicants need to provide their KYC documents regardless of whether they earn an income or not or whether they even co-own the property.
If you are applying for a joint home loan mainly for higher eligibility wherein the income of other applicants also needs to be considered, then income documents of all the applicants will be required to be shared with the lender in addition to KYC documents.
If your purpose is to save on stamp duty charges by adding a female member of the house as a co-owner of the property, then you must make sure that the draft agreements and final sale deed or the registry documents have relevant members stated clearly as co-owners.
If you are a nonresident Indian (NRI), you can issue a registered power of attorney (POA) in favour of a trusted family member for them to execute the necessary documentation on your behalf. However, you must ensure that the exact purpose of the required transactions are mentioned in the POA, thereby easing the process for compliance and reducing chances of rejection.
Factors to Consider Before Applying for a Loan
Before even applying for a joint loan, it is important to fully understand the lenders’ conditions, which differ depending on the provider you’re considering to approach.
- If the property has co-owners, in such a case, the lender, in all likelihood, insists all co-owners to become co-applicants as well.
- The lender may also insist any or one of your family members become co-applicants in the case of an NRI loan.
- If you have given the power of attorney to any of your family members, the lender is likely to insist one of the family members is available in the country as co-applicant for follow-ups and communication purposes to minimize repayment risks.
Credit Score Reports
It is always better to check your and the other co-applicant’s credit score and bureau report prior to applying. This will help to ensure that you are aware of all your past and current loans along with their performance over time.
In some cases, if it is observed that you may have an old credit card with some minor payment overdue or incorrect reporting by any financial institution, it may lead to the possibility of hampering your overall credit score, reducing the chances of approval.
In India, there are primarily four credit bureaus via which you can check your credit report. Any bureau after paying relevant fees, which is about INR 500, will process your credit report. These credit bureaus include CIBIL, Equifax, CRIF Highmark and Experian.
When to Avoid Taking a Joint Home Loan?
When a co-applicant already has significant loan obligations and is not left with sufficient income to be eligible for a higher home loan amount, it is generally advisable to reconsider taking a joint home loan and instead consider an individual home loan.
Healthy credit history is very important for lenders while considering applications and a co-applicant who has a bad credit history or poor track of repaying past loans is a major factor while assessing the eligibility of a new loan.
If your income is sufficient to cover costs with no additional benefits available in terms of tax write-offs, it is suitable for you to avoid a joint home loan and keep the responsibility of your liability limited.
Joint home loans are also best avoided if there is a plan for taking on a larger liability or loan in the near future as the joint loan may impact the eligibility criteria of future loans due to existing liabilities.
A joint home loan is a beneficial financial tool with the potential of helping the borrower secure higher loan amounts.
It can aid individuals significantly improve their spending power and investing threshold while buying a larger and more comfortable home and at the same time keeping the primary applicant’s liabilities manageable by sharing the repayment burden with other co-applicants.
If utilized correctly, it can help you enjoy higher tax benefits, while simultaneously reducing overall tax outgo on a yearly-basis.