4 Things to Know Before Signing on as a Home Loan Guarantor

admin

7 min

28 Apr 2025

admin

7 min

28 Apr 2025

4 Things to Know Before Signing on as a Home Loan Guarantor

Maybe someone in your family and friend circle is about to take a home loan to live the feeling of owning a home. They’ve tried every possible way to fulfill their most anticipated fantasy of home ownership. Still, they’ve fallen short due to their low credit score, poor loan repayment backgrounds, and many other factors.

So, as per the home loan guidelines by banks and NBFCs (Non-Banking Financial Corporations), you will be contacted to become a guarantor for their home loan approval. In this situation, you must be very alert as you’ll be bearing someone’s financial responsibility on your assets.

Yes, this is a place where you have to pay close attention, but not to panic. This home loan guarantor guide will take you through all the important considerations before you opt for a guarantor role in your close one’s home loan approval journey.

What is the Role of a Guarantor?

Simply put, it’s an alternative to the primary borrower who takes responsibility for the loan repayment in the case of the primary borrower’s collapse. As a home loan guarantor, you sign a loan application that describes your financial or non-financial responsibility regarding the repayment of the loan.

Generally, you have to play two types of roles as a home loan guarantor for any lender, which are as follows:

Financial Guarantor

Non-Financial Guarantor

Let’s understand both roles one by one:

Financial Guarantor

As a financial guarantor, you’re responsible for paying the outstanding debt on the loan plus any additional interest or late-fee charges that the primary borrower is unable to pay for whatever reason. All these details are clearly mentioned on the loan application you’ll sign at the time of the home loan arrangement. When working as a financial guarantor, you pledge your income or assets as collateral to enhance the borrower’s application. Your family members or close ones can claim more favorable loan terms, such as higher loan amounts or lower interest rates, when you work as a financial guarantor for them.

Non-Financial Guarantor

When you act as a non-financial guarantor, you are only responsible for being available as an alternate contact in the case the bank can’t reach the primary borrower. The most important thing to remember when being a non-financial guarantor is that you’re not responsible for repaying any outstanding debt, even when the primary borrower defaults.

Additionally, as a non-financial guarantor, you serve as a reference point for the borrower's reputation and symbolize their reliability. You meet robust credit history and other qualifying criteria, apart from the browser’s financial standing, asked by the lender for loan approval.

What are the Legal Responsibilities of Being a Home Loan Guarantor?

As a home loan guarantor, you can be a great helping hand for your family and friends in their homeownership journey. However, you must be aware of your legal responsibility and financial capacity to meet the repayment obligations.

So, before signing as a home loan guarantor, pay close attention to the following responsibilities to tackle the financial risk associated with this effectively:

Repayment Obligations

If the borrower does not fulfill this obligation, you are legally required to pay back the remaining loan balance.

You should be fully aware of what responsibilities you have and how you manage your finances to repay the debt as a home loan guarantor.

Documentation and Verification

You have to provide the necessary documentation for the loan application process. These documents include income proof, identification documents, and credit history.

Moreover, some banks or NBFCs may check your background and credit assessment to ensure you’re worthy of being a guarantor.

Creditworthiness and Financial Stability

Your current financial standing should feature a good credit score and stable financial position to become the most viable guarantor in the eyes of lenders.

Your income, liabilities, and repayment capacity will be assessed by the lender to evaluate your creditworthiness and financial stability as a guarantor for the home loan regarding the fulfillment of repayment obligations.

Legal Liabilities

As you become a part of the loan agreement, you should have an understanding of the legal implications of being a guarantor and how you manage repayment obligations.

You must seek expert legal advice and review the terms and conditions (loan amount, interest rate, repayment schedule, and any penalties for late payments or defaults) carefully before being a home loan guarantor for your family and close ones.

Communication With the Borrower

By maintaining constant communication with the borrower, you can stay informed about the borrower’s financial situation and be future-ready to tackle the repayment obligations.

What are the Financial Risks Associated With Being a Home Loan Guarantor?

Signing a home loan agreement as a guarantor isn’t the most comfortable feeling to have, for sure. This is due to the risks associated with being a guarantor, such as the borrower's default, which may affect your financial stability and, in extreme scenarios, your personal relationship as well. So, you need to assess those risks carefully before committing to being a guarantor.

Here, we mention some potential financial risks of being a home loan guarantor. Pay very close attention to this:

Financial Liability: In the case of your primary borrower’s defaults, it’s you who is responsible for paying the outstanding debt. If you’re also not able to fulfill the repayment obligations, this financial liability can damage your finances drastically, which may ultimately lead to a financial disaster for you.

Legal Consequences: You may face strict legal consequences if the lender takes a tough call against you in the case of a failure to fulfill the repayment obligations by you as a guarantor.

Credit Score Impact: Inconsistencies in paying the EMIs or any defaults on repaying the loan by the primary borrower can adversely damage your credit score. This can lead to hardships for you in securing loans in the future.

How to Exit From Home Loan Guarantorship?

As a home loan guarantor for an active repayment obligation, you may want to take an exit from it for any reason, including needing to take a loan for yourself, changes in your financial situation, health concerns, or relationship issues with the borrower.

However, this will not be a cakewalk for you, as you have to tackle multiple challenges like lender resistance, credit impact on the borrower, or legal complications to take an exit from the guarantorship.

Here’s how you can withdraw as a guarantor:

Step 1 Communicate with the Borrower: This includes discussing your decision with the borrower, explaining your reason for wanting to withdraw, and helping them to find an alternative solution.

Step 2 Contact the Lender: In this step, you have to write a formal request to the lender, emphasizing your wish to withdraw as a guarantor. If required, attach the necessary documents.

Step 3 Seek Legal Advice: You can consult with a lawyer to gain a better understanding of the legal implications of taking exit from home loan guarantorship.

Step 4 Check for Outstanding Dues: It is mandatory for your withdrawal that the borrower has no outstanding dues.

Step 5 Find a Replacement: As soon as the borrower gets an ideal replacement, it becomes easier for the lender to allow your exit from the guarantorship.