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A house is the biggest investment of our life, bigger than buying a car. For many, its not easy to raise such amounts of money on their own and that’s where home loans come in. In spite of the fact that, it appears as if all banks are anxious to give you a loan, it’s not easy. Getting a credit authorized can be a time taking and tedious process. Moreover, it is essential to be familiar with how housing finance works, for one to avoid surprises and regrets later on. Here are some significant things you should know beforehand:
1. Eligibility Criteria for home loans
Now almost every bank allows you to check your loan eligibility, EMI and repayment tenure online. Banks usually provide up to 60 times of your net monthly income as home loan, but you normally may not get it, as per your calculation. It is because of your pay slip. It will show LTA (leave travel allowance) and medical allowance which the bank assumes as you using it for those particular activities. Thus your net income gets reduced as per bank. Likewise, reimbursements and incentives won’t be calculated under your net income for home loan application.
Another factor affecting your home loan is the number of dependents you have. A higher number of dependents shows more commitments and it can adversely affect your loan amount. Aside from checking your financial background and income flow, they will also check your credit score. For example, individuals with a steady payment find it moderately easier to get the loan than independent individuals with inconsistent income.
A housing finance is a big investment, it requires a long tenure for repayment. Your age determines how much period you will get for repayment. If you are young it’s good, or else, there are chances the loan might get rejected.
The repayment tenure is usually calculated as per your retirement age. If you have a co-applicant who is much younger, it improves your chances of a longer tenure. This co-applicant can’t be a minor, also he/she should be a blood relative or immediate family member like your spouse. It will also help you to get higher credit since both your income will be clubbed while ascertaining the loan amount.
The property value is also considered before authorizing the credit. Banks for the most part fund 75-90% of the total cost of the house. The maximum loan to value of the property or LTV specified by the RBI is as below:
- 90% LTV for loans upto INR. 30 lakh for buying affordable segment homes
- 80% LTV for loans above INR. 30 lakhs and upto Rs. 75 lakhs
- 75% LTV for loans above INR. 75 lakhs
2. Types of housing finance
As you might know, there are two types of home loans prevalent in the market—fixed loans and floating loans. Fixed loans, as the name suggest, is a loan where you have to pay fixed rate of interest during its complete tenure. It’s good for people who are good at budgeting and likes a fixed repayment schedule. Whereas, in floating loans the rate of interest varies as per market conditions. It is advantageous when the interest rate goes down as per market conditions. But the disadvantage is you cannot budget for this amount since it will be fluctuating as per market conditions. And if the market condition is not good the interest rates can go up.
Another advantage of floating loans compared to fixed loans is that they are always cheaper than fixed loans. The interest rate can usually differ from 1% to 2.5% between a fixed and floating loan.
Usually home buyers go for floating loans in the market due to the low interest rate but it depends upon individuals and their budgeting style to choose their loan type. Also it’s important to compare these loans between different banks to get a better deal.
3. The authoritative record
As mentioned before, it’s not just your income flow, credit score can also decide your chances of getting a loan. But this is all about your financial record. Now it’s time to understand your authoritative record or say your authenticity, reliability and integrity.
Banks are lending you a huge amount and they need to be sure that you are the right person. Your chances of getting a loan can take a backseat if you are or were a party to a criminal/civil case.
Some banks do ask for a minimum down payment from you, as security for the home loan, to understand your stake in the whole investment process.
4. Long term is costlier
It is tempting to have a longer tenure for loan repayment as the EMI amount will be lesser. However it is dangerous, since you will be paying almost 57% more on interest for the borrowed amount. It doesn’t stop there it goes to 128% in 20 years. The longer the period the more compound interest a bank earns from you.
Stick to the minimum tenure period you can afford and plan wisely.
5. Know your foreclosure clause
It is always good to pay off your dues beforehand. Likewise, your home remains your bank’s till you repay your loan amount. As explained above, longer period can actually hurt you more than you know.
If you have adequate savings and can pay in lump sum, its good to clear your housing loan midway. To do that you need to know about your foreclosure terms and some charges may be incurred but its good in the long run. Compare and go with banks who have better foreclosure terms.
6. Additional Charges
Banks do charge administrative, processing or service fees. These charges vary and you need to discuss this with your banker. Understand if it’s a one time charge or a monthly charge. If it’s a monthly charge it usually comes under your EMIs and you need to plan accordingly.
Read your agreement documents clearly before committing to the banker. You need to have an overall and comprehensive knowledge of your loan application and its disbursal.
If you are a person who is going for home loans, go through these steps, refer more and analyse your options thoroughly.
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