The relationship with your parents is always a cherished one and lasts a lifetime. If you are looking to move out of your rented accommodation and purchase a home of your own, you can also consider availing of a joint home loan with your parents to fund the same.
As any parent would want the best for their child, they will likely be happy to become your co-applicant or guarantor, if necessary. Your parents can even act as an intermediary if you do not have a ready reference from another friend or family member who can act as the co-applicant in case your parents cannot do so directly. However, to avail a joint home loan with your parents, there are certain things that you must keep in mind:
While there are benefits of availing of a joint home loan, here are a few pitfalls you must avoid to ensure the home you are seeking for creating a happy nest doesn't brew misunderstandings, and adverse financial implications.
1 Mistake: Assuming that the parents will pay back the loan
While you can expect your parents to be supportive when you ask them to club their finances with yours, you cannot assume that they will be individually responsible to pay back your loan. If you are planning on taking out a joint home loan with your parents, it is important to know that both you and your parents are liable for the entire loan amount. This means that if either of you fails to make repayments, the other person is responsible for repaying the entire loan. For instance, if you and your parents take out a joint home loan for ₹1 Cr, you both are together responsible for the whole amount and not ₹50 lacs each.
At the same time, make sure you are prepared to make the required payment on time if your parents don’t pay back the loan. This will show that you are a responsible borrower and this will also help you in building a better credit score.
2 Mistake: Rushing into an agreement without considering future circumstances
While the joint home loan can help you save money and build a better credit score, it can also cause a lot of stress to you and your parents if things go south. Before you decide to take out a joint home loan with your parents, both applicants must be on the same page.
It is possible to experience changes in financial circumstances during the tenure. For instance, if your parents’ financial circumstances change and they’re unable to make their mortgage repayments, you’ll need to manage the full loan repayments by yourself. Also, there can be a situation where, on a 20-year home loan, you wish to sell the house within 7-8 years, but your parents do not.
Having different financial needs and goals can complicate things. Due to a lack of clarity on each owner's share, dividing the property could be a painful process. If one joint owner refuses to pay the EMIs because of hostile behaviour, things can get even more complicated. To purchase a property jointly, all these aspects must be taken into account.
3 Mistake: Missing out on other financing options while applying for a home laon
While joint home loans with parents can be a great way to get your foot in the door of the housing market, you may be better off exploring other avenues of financing. There are a few things to consider before taking out a joint home loan with your parents.
First, you'll need to make sure that your credit is in good standing. This will give you a better chance of qualifying for a loan with favourable terms. Next, you'll need to consider the interest rate on the loan. Even though two applicants make it stronger to get approved for a home loan with a possibly low interest rate, in cases where the one with higher salary has the lower credit score and vice versa, your lender can use the lowest score when determining your mortgage rate. In turn, the mortgage payment could increase and the rate could increase upto 1% depending on the property and other external factors.
If you're looking for a way to finance your first home, be sure to explore all of your financing options before making a decision. This will help you avoid complications associated with a joint home loan. And it will also help you avoid taking more money from your parents than you need.
A joint home loan between parents and children can be a great way to save money on your home purchase and build a better credit score. But before you rush into a joint home loan with your parents, make sure you consider both the benefits and the risks. You should carefully consider the interest rates and make sure they are the same for both the parents and the children. You should also decide how the payments are going to be made and who will be responsible for making the payments on time. And you should make sure you don’t rush into a joint home loan just because you think it’s easy.
Atul Monga is the co-founder and CEO of BASIC Home Loan.