Taking a home loan to buy your first house? Five factors to consider
Though you may have salary or income to support your home loan application, here are some factors you cannot ignore.
Loans make many things accessible and homes are no exceptions. For millennials, loans are a part of life and they may not think twice before buying a home with a loan. However, here are five factors you should keep in mind even if you have adequate salary to get a loan and to service it.
When you are out to buy your dream home with a loan, the most important factor is the property under consideration. The home acts as a collateral to your loan and hence the bank will be serious with the property. If you are buying the property in an area where the banks do not offer loan, you may not get a home loan. “If the property is too old, you will not be offered loan,” says Anil Rego, Founder of Right Horizons, a wealth management firm.
If the property’s residual life is 20 years, do not expect the bank to offer you a home loan for 20 years. Banks prefer new properties over old ones. “Each bank will have different norms when it comes to funding re-sale properties,” Rego adds. Ensure that the documents of the property and ownership are in place.
Valuation of the Property
This is an important element in the home loan process. The bank commissions property valuation exercise. The report submitted by bank’s agency is important for the bank. Even if you are willing to pay any price for a property the bank will not go beyond the valuation done by its valuers.
Never go by the prices quoting in the market, especially when you are buying resale property. After demonetisation, banks have been going low on property valuation to account for the price correction in real estate market. Know the valuation of the home arrived at by the bank before entering into an agreement to buy that property.
Loan to Value Ratio
After arriving at the valuation of the property, the bank will apply loan to value ratio while deciding the home loan amount. For a property priced more than Rs 75 lakh the bank typically lends up to 80 percent of the price, otherwise banks lend up to 75 percent of the money. For the remaining, banks expect you to bring in your contribution.
If the valuation of the property is down and the bank is going to apply loan to value ratio, then you are going to get less loan, than you have anticipated. You have to be prepared for such a situation. Let us understand this with an example – You are looking at a property priced at Rs 50 lakh. You are expecting the bank to lend you 80 percent of the price – that is a loan of Rs 40 lakh. However, if the bank’s valuer prices it at Rs 40 lakh (20 percent below the asking price), then the bank won’t go beyond Rs 32 lakh even if your salary supports a higher loan amount.
In case of such a shortfall, either you have to forgo the token amount or bring in your own money to fund the purchase of the house.
Credit Card Dues
This may sound trivial. But do not ignore your credit card dues. Though only a fraction of your credit card dues are accounted for while computing your debt capacity, lenders do look carefully at credit card dues while taking lending decision. “Use credit cards in a prudent manner. Spend only that much amount of money that you can repay before the due date,” says Jitendra PS Solanki, an independent financial planner. Do not miss your credit card payments when you are going to apply for a home loan. Opting for revolving credit or converting credit card debt into personal loan may be seen with some amount of suspicion by banks. To play it safe, pay your credit card dues in full as far as possible in six months preceding your home loan application. “All your EMI put together should not exceed 25 percent of your monthly income,” points out Solanki. This will ensure that you remain financially fit.
The biggest shocker may come in the form of your credit score. Most banks ask for CIBIL credit score of more than 750 and above out of 900 while processing the home loan application. If you are going to buy a home, check your credit score before giving a token amount for the flat. You can check your credit score for free once in a year.Home loans are inevitable given the high home prices. The trouble is they are even more difficult to get if your money matters are not in order. Put your best foot forward.