Planning to take a home loan? Check these four points to see if you are ready

Home loans are big-ticket loans with tenures of 15 years or more. Hence, those planning to avail a home loan must brace themselves for a long-term financial commitment. Given that lenders also take various factors into consideration while assessing a borrower’s creditworthiness,  it is imperative for the latter to take certain steps for increasing his/her chances of home loan approval. Here are four such points that loan applicants must work on.

Accumulate the down-payment amount before applying

The RBI allows lenders to finance 75-90 percent of a property’s cost through home loans. Applicants are expected to arrange for the remaining amount on their own as down-payment or margin contribution. Hence, those planning to buy a property through a loan should aim at accumulating 10-25 percent of the value before applying for a loan.

Borrowers should ideally aim towards making a higher down-payment amount as doing so would reduce the interest cost of the home loan. Also, given that a higher down payment reduces credit risk, as those making higher down-payments have better chances of home loan approval, usually at a lower interest rate.

Also read: How to leverage your property to raise a loan at low rates

Review credit score at regular intervals

Lenders consider the credit score of loan applicants while evaluating their loan applications. Those having higher credit scores, i.e., 750 and above, usually have better chances of loan approval. Many lenders have also started offering lower interest rate to applicants with good credit scores.

Hence, those planning to avail a home loan must check their credit score at regular intervals before applying for a loan. One can access free credit reports from credit bureaus or visit online financial marketplaces to do so, along with monthly updates. Following this practice would enable borrowers to take corrective steps in case they detect any clerical errors in their credit report, and have them rectified. If these errors are not rectified, they can adversely impact the chances of home loan approval.

Check EMI affordability

Lenders prefer applicants having monthly loan repayment obligations, including the EMI for the new home loan, within 50-60 percent of their monthly income. Those exceeding this limit should aim at bringing it within the 50 percent range by prepaying some of their existing loans. If doing so is not possible, applicants can opt for a longer tenure to reduce their home loan EMI and overall monthly loan repayment obligation.

Use online home EMI calculators for estimating the optimum EMI, after factoring in your repayment capacity and monthly investments required for achieving crucial financial goals.

Factor in home loan EMI while setting aside emergency fund

Unforeseen financial emergencies or loss of income can adversely impact one’s loan repayment capacity. Non-payment of home loan EMIs by the due date can attract hefty penalties and ultimately reduce the credit score. Liquidating existing investments for repaying loan EMIs would have a negative implication on your long-term financial health. Redeeming equity investments during steep market corrections may also lead to book losses.

Setting aside an emergency fund can help avoid such extreme situations. This corpus must include expected loan EMIs for at least six months. Doing so will allow borrowers to continue with their EMI repayments, especially during financial emergencies.