Many of us look to buy our dream apartment or house early on in our careers. In almost all such cases, taking a home loan becomes inevitable, given the high real estate prices prevailing in cities across the country and also the tax benefits that come with home loan repayments.
Given that banks and financial institutions sanction loans based on our current income, existing indebtedness and so on, maintaining a clean credit record becomes important.
Here are some ways to improve the chances of your home loan getting approved by banks.
Clear outstanding loans
Even if you have a high income, banks lend amounts only up to a certain proportion of your salary. Usually, these financial institutions ensure that your EMIs don’t take up more than 60 per cent of your income (including your monthly outflows towards the home loan).
While calculating your home loan eligibility, financial institutions deduct total EMIs from the monthly income to determine a suitable amount for sanctioning.
Wilfred Sigler, Director - Sales and Marketing at CRIF High Mark says, “First step for home loan aspirants is to improve their debt-to-income ratio. They could look at prepaying or closing their existing loans smaller outstanding before applying for home loan.”
While closing all your other loan accounts, don’t forget to take the “no-dues” certificate from the lender. This certificate shows that you are not overburdened with EMIs and can afford an additional loan. A no-dues certificate is also essential for the credit report to reflect the closure on the loan.
Naveen Kukreja, CEO and Co-founder of online financial marketplace Paisabazaar.com says, “Prepay loans that have higher interest costs first, as home loans come with the lowest interest rates for retail borrowers.” Prepaying existing loans (personal loan, credit card dues, car loan, etc.) availed at a higher rate would result in interest cost savings.
Select the lender offering the highest loan-to-value ratio. This information is not available publicly and so you may have to meet a bank representative to get more information. A higher loan-to-value (LTV) ratio means a higher loan amount would be given. The Reserve Bank of India (RBI) has capped LTV ratios at 90 per cent, 80 per cent and 75 per cent for home loans of up to Rs 30 lakh, Rs 30-75 lakh and above Rs 75 lakh, respectively. The LTV ratio of home loan would further depend on the property (location, builder’s record etc.) and a credit risk assessment of the loan applicant. Kukreja says, “The LTV ratio offered to the same loan applicant may differ across lenders. This makes it important for home loan borrowers to compare LTV ratios offered by the various lenders.”
Readying a down payment
While applying for a home loan, you have to arrange for the down payment amount first. Arranging for down payment can be easy if you look at it as a financial goal, say financial planners. Once you decide to accumulate the amount, you should be focused on the target, time on hand and your risk profile. “If you have more than five years on hand, you should consider investing in equity mutual funds or aggressive hybrid funds,” says Pankaj Mathpal, founder and CEO of Optima Money Managers. For shorter tenures, it is better to stick to fixed income options such as fixed deposits, recurring deposits and bond funds. While accounting for down payment you should also take into account consideration the inflation rate for three or five years, stamp duty and registration costs.
Add all incomes and bonus amounts
Apart from our salaries, it would be wise to club other sources income while making a case before the bank. So, bonus amounts, rental income and any other source of inflow must be added to bolster your loan eligibility.
Sujata Ahlawat-Vice President and Head, Direct to Consumer Interactive, TransUnion CIBIL advices, “While applying for a home loan, a borrower must include a performance-linked bonus and other sources of income to increase the eligible home loan amount. This will have a positive impact on borrower’s repayment capacity on the lender.”
You could also add a co-applicant while applying for a home loan. Shaji Varghese, Executive Director and Business Head, PNB Housing says, “This will help the primary applicant in availing a larger home loan amount, as the lender would club the co-applicants’ income with his/her income while assessing his/her home loan repayment capacity.” You should ideally take a loan jointly with your working spouse, son or daughter as co-applicant.
Opt for longer tenures
Longer loan tenures result in lower EMIs, which in turn reduce the fixed obligation to income ratio of a loan applicant. Kukreja says, “Hence, those opting for higher home loan amounts should opt for a longer tenure to increase EMI affordability and, thereby, their loan amount eligibility.” Some financial institutions offer longer tenure home loans of 25-40 years.However, prepay your loans whenever you can. Not only does this improve your credit score, it also makes you debt-free, leaving you with surplus cash that you would rather invest elsewhere. Denny Tomy, Business Head at loan advisory firm, theloanguru.in says, “Prepay the longer tenure home loans if there is a growth in income, annual bonus and higher savings because when you service a long-tenure loan, you will end up paying higher interest.”