Thinking of taking a home loan? Here is how to go about it
Banks have their reservations as well. With housing prices going up constantly and banks having a good deal of NPAs, lenders also evaluate the property and the borrower‘s profile before handing out loans.
Buying a house is often a big, complicated decision and finding the right lender to support the purchase is one of the most important steps towards attaining your dream. You must compare all terms and conditions and understand the loan structure before you zero in on a bank.
Banks have their reservations as well. With housing prices going up constantly and banks having a good deal of NPAs, lenders also evaluate the property and the borrower’s profile before handing out loans. So, before you approach a bank for loan, you must have an understanding of the parameters on the basis of which a loan is sanctioned.
Here is an easy and effective comprehensive guide to understand home loans from a lender and borrower’s perspective.
1: Eligibility criteria and documentation
Banks and NBFCs have various parameters upon which they calculate a candidate’s potential to repay a loan on time. From the age of the applicant to the nature of employment and the average monthly income to work experience, banks evaluate a candidate’s profile in detail to determine eligibility for a housing loan.
2: Importance of credit score
Banks and lending institutions often refer to the credit score of an applicant in order to get an understanding of his lending and repayment habits. A personalized credit score like the one offered by CIBIL is considered healthy if it is over 750. If a housing loan is rejected due to poor score, reapplying for it will only bring down your score further. However, do remember that you need to have a credit history established for the banks to refer to in order to determine whether you are a good potential for loan.
3: Loan amount and tenure
The total loan amount you are eligible for is decided by a team of in-house experts who use various yardsticks to reach at an amount depending on the valuation of the property. Banks usually lend anywhere between 80 and 90% of the price of the property. The remaining needs to be raised by you towards making down payment. The tenure of a home loan usually ranges between 5 and 20 years, although some banks extend the tenure to even 30 years. The longer the tenure, the more you pay towards interest.
4: Home loan interest rates
Home loans can be availed at both fixed and floating rate of interest. There are two types of fixed rate of interest: one stays constant through the tenure and the other gets revised regularly as per the prevalent repo rates controlled by the Reserve Bank of India.
In a floating interest rate scenario, the loan rate of interest is linked to the bank’s base rate or MCLR. Your loan EMIs can therefore vary with every change in those rates. However, you have the choice of converting from a fixed rate loan to a floating rate one, or vice versa.
5: EMI and pre-EMI payment
An Equated Monthly Installment (EMI) is the monthly payment you make to the bank or lender towards loan repayment. EMIs can be fixed or they can vary each month depending on your home loan interest type. While a property is under construction, the full loan amount is not paid to the builder. During this phase, borrowers can pay pre-EMI towards the repayment of the interest on the amount disbursed by the bank.
6: Pre-payment of home loan
Paying off loans early is always a healthy habit and you can pre-pay your home loan by paying an additional sum over your regular EMI. Through pre-payment, you can either choose to reduce the number of EMIs or the tenure of your loan.
7: Tax savings
You are ordinarily allowed tax deductions of Rs. 150,000 towards principal payments and Rs. 200,000 towards interest payments in a year for your home loan.
The writer is CEO of BankBazaar