How does a co-applicant improve home loan eligibility?

Buying a home is one of the biggest milestones in an individual's life. But achieving that dream can come with a lot of constraints, like existing debt, limitations on loan approvals, and individual income. Some homes might cost so much it isn’t possible to buy them on a single income source. That’s when adding a co-applicant to the application can significantly increase the borrowing capacity and greatly improve the chances of getting loan approvals.

In this post, we discuss why including a co-applicant is an effective strategy to improve your chances of securing a home loan.

Adding a co-applicant boosts your eligibility by combining two incomes into a single debt-to-income ratio. Loans are approved by institutions based on the applicant’s repayment capacity. In the case where two applicants apply for the same loan, the household income increases, and the credit risk for the institution reduces.

A co-applicant expands your capacity to maximize your home loan eligibility by adding their credit score and income while reducing the risk profile.

When you apply for a home loan, your income and the co-applicant's income are combined as one monthly cash flow. This reduces the chances of the application getting rejected by significantly lowering the overall debt-to-income ratio. As a result of the improved financial strength, lenders become far more comfortable in approving higher loan amounts and offering preferential interest rates too. Here’s what happens when a co-applicant joins:

Enhanced Loan Amount Eligibility

Lenders typically cap monthly home loan installment costs at around 50% to 60% of the net monthly income. By merging two incomes, the threshold increases significantly, making it easier for applicants to qualify for larger loan amounts for the purchase of high-value properties.

Reduced Credit Risk

If the primary applicant has a moderate credit score or a limited credit history, they can include a high-credit-score (750+) applicant with them to strengthen the creditworthiness of the application. Lenders view joint applications as a low-risk profile because both parties carry the legal liability for repayment.

Lower Interest Rates & Concessions

Financial institutions often offer interest rate concessions when one of the applicants in a co-borrowed loan is female. Applying jointly with a spouse or a female family member can get you a lower interest rate, reducing the burden over a 20- to 30-year period.

Shared Tax Benefits

Under the standard tax regulations (Section 80C and Section 24), both the co-borrowers can claim tax deductions individually on the principal and interest repayments. This allows you to save more on income tax while sharing one single loan entity. To enjoy the benefits, both the co-applicants must also be co-owners of the property and actively contributing to the EMIs.

Family Members

While sharing a home loan with an applicant is allowed, lenders are very specific on who is allowed to be a co-applicant. This is done to avoid ownership disputes or legal complications during recovery. Family members are allowed, but spouses are preferred co-applicants in all standard home loan products, as the income sharing is fully accepted.

Parent & Child

Parent and child co-applicants are also widely accepted. Father/Son or Mother/Son are common applications provided the child is an earning member or the primary heir. When the case includes a father and his unmarried daughter, the loan is usually permitted if the property is registered in the name of the daughter; this is to ensure avoidance of post-marriage disputes.

Extended Family

For extended relations like friends and siblings, they might face stricter policies. Brothers are allowed to apply as co-applicants only if they reside at the same residential address and intend to be joint co-owners of the property. Many Indian banks strictly exclude sisters, unmarried partners, friends, cousins, and distant relatives.

FOIR optimization and income pooling

The fixed obligations-to-income ratio is generally taken into consideration by Indian institutions to determine the maximum borrowing capacity of the applicant.
For example, if an individual is earning ₹100000 per month with an ongoing vehicle EMI of ₹20000, then their loan capacity will be capped at ₹30000 under the 50% rule of FOIR. But, when the individual includes another borrower earning ₹80000pm, the total combined income comes to ₹180000, thereby increasing the cap up to ₹70000pm.

Income Stability and Employment Consolidation

Lenders thoroughly evaluate employment status, whether the individual has been earning a stable income or not. If the primary borrower is a freelancer or business owner with fluctuating income, they can pair with a stable salaried co-applicant and balance the cash flow. This reduces the risk profile for the lenders.

Extension of Maximum Tenure

When paired with younger applicants, the loan tenure can also increase. For instance, if the primary borrower reaches around 50 years of age, the institutions restrict the repayment tenure to 10 or 15 years based on the standard working life of the individual. Adding a younger earning co-applicant, like a child in their late 20s, can increase the chances of the tenure being increased up to 30 years depending on the profile.

Important Considerations Before Adding a Co-Applicant

While co-borrowing is beneficial, there are legal liabilities that will fall on both parties involved. Both borrowers share equal responsibility for the debt repayment. If the primary borrower by any chance defaults on monthly repayments, the co-applicant will be responsible for paying the same.
Any delayed or defaulted EMIs will negatively affect both CIBIL reports, damaging their respective credit histories. It is also critical to understand that there is a difference between co-applicants and co-owners. A co-owner of the property holds a legal share in the title deed; the co-applicant shares in the debt repayment liability.

If you are looking for a home loan and your property has a higher value, it is better to consider a co-applicant. It will drastically improve your credit score, your borrowing capacity, and your risk profile for the lending institution. Niwas Housing Finance provides you with home loan solutions that will help you become the owner of your dream home. Connect with us today!