Difference Between Co-Signer and Co-Applicant

31-Aug-2024 | Home Loan

To secure a home loan, it is significant to comprehend the responsibilities and roles of a co-applicant and a co-signer as these play a crucial role in the home loan approval process. Both co-signer and co-applicant effect the financial obligations, repayment terms, and loan terms. This blog will help in understanding the major differences between co-applicant and co-signer in relation with home loan and making better financial decisions.

What is Home Loan?

Before we get an in-depth understanding of these terms, it is essential to know what a home loan is. A home loan is offered by financial institutions in order to support people purchase a residential property. The amount borrowed is to be paid by the borrower to the lender in a fixed loan tenure with interest. Home loans are the typical secured loans that means the property itself is served as a collateral or the loan taken.

Who is a Co-Signer?

Co-signer is a person who approves to repay the loan if the primary borrower in any case fails to make the payment of the loan amount. Financial stability and credit history of the co-signer is also take into consideration at the time of home loan approval process. Though, there is no legal right of the co-signer over the property.

Roles and Responsibilities of a Co-Signer

Guarantee to Repay Loan Amount: It is the key responsibility of a co-signer to become a guarantor to repay the loan if there is any default by the primary borrower. Thus, the co-signer is legally responsible for repaying the home loan.
Effect on the Credit Score: There is a direct impact of the co-signer’s credit history and credit score on the home loan. If the payments are made regularly, it can improve the credit score whereas any defaults will result in negative effect on the credit score.
Absence of Ownership Rights: The co-signer does not possess any legal right over the property. The co-signer only has a responsibility to repay the loan but does not have any rights.

Who is a Co-Applicant?

A co-applicant is an individual who applies for a home loan jointly with the primary borrower. Co-applicants typically share the responsibility of repaying the loan and have ownership rights over the property. This arrangement is common among spouses, family members, or business partners.

Key Responsibilities of a Co-Applicant:

Shared Repayment Responsibility: Both the primary borrower and the co-applicant are equally responsible for repaying the loan. The loan amount and tenure are determined based on the combined income and creditworthiness of both applicants.
Ownership Rights: Co-applicants have ownership rights over the property. This means they share the benefits of property ownership, including tax benefits and appreciation in property value.
Impact on Credit Score: The repayment behavior affects both the primary borrower’s and the co-applicant’s credit scores. Timely payments can boost their scores, while defaults can negatively impact both.

Benefits of Having a Co-Signer

Having a co-signer can be beneficial in several scenarios, especially when the primary borrower’s creditworthiness is not strong enough to secure a loan independently. Here are some advantages:

Improved Loan Approval Chances: A co-signer with a strong credit history can improve the chances of loan approval, especially if the primary borrower has a poor credit score or unstable income.
Better Loan Terms: The presence of a co-signer can sometimes result in better loan terms, such as a lower interest rate, because the lender’s risk is reduced.
Flexibility for Borrowers: Young borrowers or those with limited credit history can benefit from a co-signer’s support, enabling them to purchase a home they might not qualify for on their own.

Benefits of Having a Co-Applicant

Including a co-applicant in your home loan application can also offer several benefits:

Higher Loan Amount: Combining the incomes of the primary borrower and the co-applicant can result in a higher loan eligibility, allowing for the purchase of a more expensive property.
Shared Financial Burden: The financial burden of repaying the loan is shared, making it easier to manage monthly repayments.
Tax Benefits: Co-applicants can avail tax benefits on both principal repayment and interest payment under Sections 80C and 24(b) of the Income Tax Act, respectively.
Joint Ownership: Co-applicants have joint ownership of the property, which can be advantageous in terms of asset distribution and family security.

Conclusion

Understanding the differences between a co-signer and a co-applicant in a home loan is crucial for making informed decisions. While a co-signer acts as a guarantor without ownership rights, a co-applicant shares both the financial responsibilities and ownership of the property. Each option has its advantages, and the choice depends on your financial situation, creditworthiness, and long-term goals. By carefully considering these factors, you can select the arrangement that best suits your needs and helps you secure the home loan that aligns with your financial aspirations.