Common home loan problems and how to avoid them

Rajiv RajCreditvidya.comApplying for a home loan may seem like a simple procedure of submitting a few documents and signing a few pages. However, this process can be long, even without any obstacles. First of all, there is always the possibility of initial rejection. Then there is the confusion of fixed rate vs. floating rate. To top it all, you might not even get the entire amount you were hoping for. When it comes to home loans, informed decision is always the right decision. Home loan will be the biggest loan of your life, both in terms of the amount and the tenure. Doing your homework is pertinent. Here are some of the common problems that are faced by home loan borrowers and how you can avoid them.1. Non-refundable processing feesWhen you apply for the home loan, they will charge you a processing fee which can range anywhere from 0.25 to 0.50 percent of the entire home loan amount. This fee is usually non-refundable. This means that even if your loan application is rejected, you will not be able to get this amount back. Therefore, it is better to do a bit of research about the banks and their processing fees policies, before you apply for the loan. If the bank promises you to refund this amount, trust only the written documentation duly signed by the bank official.2. Rejected applicationIf your home loan is rejected at the first stage there could be three main reasons. Firstly, you may not be meeting the bank’s eligibility criteria. Secondly, your credit score may not be good. Thirdly, the poor paperwork has caused the bank to be unable to authenticate your details. To avoid these, you will have to make sure that you are meeting all the eligibility criteria required by the bank. Try to build a good credit score and pull off your credit report to make sure that there is no inconsistency. Also, make sure that there is no discrepancy in the submitted documents. 3. Fixed rate or floating rateMost banks will provide you the option to select from fixed interest rate and floating interest rate. The fixed interest rate is supposed to be ‘fixed’ throughout the tenure of the loan. On the other hand, floating interest rate is normally linked to Prime Lending Rate (PLR), and is revised with the changes in PLR. For most home borrowers, it is rather difficult to predict the interest rate movements 10 year or 20 year down the line. Therefore, they find it safer to stick to the fixed interest rate, even if they have to pay a little higher. The catch here is, even the so called fixed rate is not actually ‘fixed’. The bank revise their interest rate, every two years or so, as per the clause in the prints. A customer, therefore, needs to be well versed with all the clauses in the fine print. Also, do some homework on how the home loan interest rates have behaved during the periods of low and high interest rate.4. Bank valuation & market valueWhen a bank is giving you home loan, the home is their security. In case, you will not be able to pay your instalments, the bank can sell the property for procuring the loan payment. For this, it needs to value your property. Unfortunately, oftentimes the bank’s valuation of your property is always lower than its market value. Among other factors, their valuation depends on how much money they will get if they sell your house, which is almost always less than the market value. This will have a huge impact on the amount of money you can borrow from the bank. To avoid this situation, get a proper valuation of your property before you apply for the loan. Also, make sure that you have the contingency amount ready, in case the disbursed loan is less than what you asked for.