With digitised finance, you can apply for a loan sitting at home Every home loan has a list of eligibility criteria in terms of age, income, occupation etc So, before you apply for a home loan, you must keep in mind a few things
Whether for the purpose of Investment or living in it, owning a house is something everyone desires. However, buying property isn’t an easy task, financially speaking, and it often requires taking a home loan.
Taking a Home Loan isn’t as complicated as it used to be. With digitised finance, you can apply for a loan sitting at home. On the internet, you can also compare loan options before finalising one that has the best loan eligibility and most attractive interest rate and repayment terms.
All banks and lending institutions have their own criteria to evaluate a loan applicant’s creditworthiness and loan eligibility. The property and the builder’s profile are evaluated too before the loan sanction. So, before you apply for a home loan, you must keep in mind a few things.
Importance of Credit Score
The credit score of an individual reflects his repayment practices and overall credit history. As of today, many banks and lending institutions offer their most attractive interest rates to applicants with a credit score of 750 or more. A score below this threshold isn’t a calamity. You may be offered loans at more stringent terms. If your score is poor though, you may face rejection. Remember not to apply for a loan repeatedly if faced with rejection, as it would only lead to further lowering of your credit score. If your credit score is a problem, look for ways to improve it (such as settling existing loans, repaying credit card dues on time, etc.) before you reapply for loan.
Eligibility Criteria & Documentation
Every home loan has a list of eligibility criteria in terms of age, income, occupation etc. If a candidate fails to meet the minimum age requirement or the income bar etc., the lender may not sanction the loan, or sanction it at more stringent terms.
Loan Amount & Tenure
Banks usually finance between 70% and 90% of the property value, depending on the borrowing potential of the candidate. The rest has to be raised by the loan applicant. NBFCs and HFCs may be able to provide a higher loan-to-value ratio. Depending on the age of the loan applicant, the loan tenure can be as long as 20 or 30 years. While a longer tenure means smaller EMIs, your interest outgo in the long-term would be significantly higher. You should decide on the optimum loan tenure keeping in mind your income-generating and the need to keep interest payments at a manageable level. Once a loan is sanctioned, you can look to reduce the interest burden through periodic principal pre-payments.
Home Loan Interest Rates
When you take a loan, you have to pay interest on it. Home loan interests are of two types: fixed and floating. While the fixed rate of interest stays constant through the tenure, the floating one gets revised based on macroeconomic factors. The floating interest of bank loans are linked to the MCLR. NBFCs and HFCs charge an interest rate linked to the PLR. Thus the EMI amount varies with every change in those rates.
EMI and Pre-EMI Payment
An equated monthly installment (EMI) is the amount you pay every month towards repayment of the loan. This amount is fixed depending on the home loan interest rate. However, while a property is under construction, the lender disburses the loan in tranches as per the stage of the construction. The borrower need only pay the pre-EMI towards these disbursals.
Pre-payment of Home Loan
If you have access to any surplus cash such as annual bonus or performance reward, try pre-paying the loan with it. Pre-payment is a healthy habit and you can do so by paying an additional sum over your regular EMI or by reducing the tenure. Pre-payment at the loan especially can help tremendously reduce your interest burden.
Tax Savings
On home loan principal payments, you are allowed tax deduction of Rs. 150,000 under Section 80 C and on interest payments, you get a deduction of Rs. 200,000 under Section 24B.
(The author is CEO of Bank Bazaar)
