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The economic recovery, stable incomes, and attractive interest rates have made a favourable impact on the demand for home loans. These loans have always been popular, from attractive interest rates to a home loan tax benefit. Even the Government, through its schemes like Pradhan Mantri Awas Yojna and house loan tax exemption benefits, encourages citizens to invest in houses. Now, one can apply for home loans, individually or jointly. Not everyone, however, can become a co-applicant.
The following family members are eligible: spouses, sons with either parent, an unmarried daughter with either parent & two brothers. However, a sister and a brother, two sisters, friends and relatives are not eligible to be co-applicants. When brothers apply for a home loan, it is crucial that they live in the same house or that they are co-owners.
Having understood who a co-applicant can be, let us examine whether taking a home loan with sibling is worthwhile.
For better understanding, here are the pros and cons of taking a home loan with a sibling.
A borrower must meet some loan requirements before their loan can be approved. These may include minimum income balance and credit scores. When an individual applies for a home loan with a sibling, the income balance rises. In addition, a higher credit score of one co-applicant may compensate for a low credit score of another. This way, there are more chances of loan approval and a higher loan than applying individually.
The Income Tax benefit on home loan is available to the co-owners. However, certain conditions must be met to qualify for the house loan tax exemption. Like, this home loan tax benefit will only be available if the co-owners pay the home loan instalments. If one co-borrower is not contributing to any loan payments, then the other co-borrower can take the entire Income Tax benefit on home loan. Section 80C allows for a deduction, up to Rs 1.5 lakh, for the principal portion of the loan. Section 24 provides for deductions, up to Rs 2 lakh, for the interest payment on the loan. Both co-applicants of the loan are eligible for a house loan tax exemption in their respective incomes. The home loan tax benefit also covers payment of any duty and registration charges.
Lenders approve the loan after reviewing the repayment history of borrowers. They will offer better home loan interest rates if they feel that borrowers are financially sound and have a good credit history. In other words, lenders will always prefer buyers with low-risk levels. With two applicants, the burden of repayment risk gets shared. Hence, if one co-applicant does not have sufficient funds to pay, the other will fulfill the obligation. Thus, reducing the default risk.
If one does not want to reduce their credit score and chances of getting future loans, it is necessary to repay the debt on time. In emergencies, there may be insufficient funds, which may delay the payment. Here is where the co-applicant comes in. Co-applicants reduce this financial stress and take care of the repayment.
There is a process of legal heir approvals, documentation, and many other legal hassles for property transfers. However, in the case of co-owners, the process of home loan transfer is more effortless. If one owner dies, the co-owner becomes the rightful heir. The co-owner only needs to apply for fresh registration in a lawyer’s presence. Also, remember for a home loan transfer, the co-owner first needs to transfer the property.
The repayment burden gets divided between the co-owners. However, the financial burden is back if discord arises, and a sibling refuses to pay the loan. The other co-owner will have to adjust their financial budget to repay the loan. It is advisable to apply for a term loan to avoid such risks.
If the property is in dispute or has an ongoing legal case, one can’t sell it. In case of disagreements, parties may cooperate on signing the sale agreements. It becomes burdensome on the party, which requires funds urgently. The other party may also take advantage of the situation.
A credit score is a representation of the creditworthiness of a borrower. Higher the credit score, the higher the chances of loan approvals. Defaulting in repayment of debt negatively reduces the credit score. In a joint home loan, even if one co-applicant defaults on repayment, it will affect the credit scores of both borrowers. Further, a low credit score will reduce the chances of loan approvals.
The above article gives a detailed overview of taking a joint home loan with sibling. There are advantages to co-own a home loan with your siblings, like a home loan tax benefit, convenient home loan transfer, and more. However, before applying for a joint home loan, analyse all the pros and cons, ask questions, and clarify any doubts. You can even take the assistance of tax experts to maximise your income tax benefit on home loan.
Sometimes, to help a sibling out, an individual may co-sign the loan. However, they forget that they will be personally responsible for its repayment in case of default. Hence, one must analyse all the risks. Also, the co-applicants must discuss how to resolve possible disagreements in the future.
Policies, Codes & Other Documents