Owning a house is one of the most important things in life. It brings security, stability and a sense of comfort in your lives. Many of us have to take the difficult decision of making our dream house on our own, for that we may have to take home loans. For most first-time home buyers, home loan is the only way that provides for the required monetary support they need.
If you are planning to take a home loan, it is very important that you clearly understand the pros and cons of availing one. It is a debt that will make you will be committed to repay for many coming years until the entire amount is repaid.
Before understanding the other things, let’s first understand the types of Home Loans-
ADJUSTABLE/FLOATING RATE LOANS- In this type of loan, the interest rate is associated with the lender’s benchmark rate. If there is any fluctuation in the benchmark rate, the interest rate also changes proportionately.
FIXED RATE LOANS- In a fixed rate loan, the interest rate does not change and is fixed at the time of acquiring the loan. This rate of interest is stagnant throughout the tenure of the loan.
COMBINATION LOANS- These loans offer a certain part of the loan at a fixed rate of interest and the remaining part at a floating rate of interest.
Eligibility Criteria- The first step before applying for any loan and specifically home loan is checking your eligibility criteria. The lending organizations will review your eligibility for home loan on the basis of your income (salary/ pension/ business) and check for your repayment capacity. The other key elements include age, qualification, financial position, number of dependants, spouse’s income and job stability.
Pre- Approve your Home Loan- We strongly advice that the claimant must get the home loan pre-approved before selecting a home that he wishes to buy. Pre-approval helps you clarity in making decisions as you know your exact budget that helps you in a more focused search. Pre-approvals help negotiate and close deals better and faster. In fact, there are certain projects that are approved by the lender; they further provide relaxation in the number of property documents needed by them.
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Loan Amount- Most home loan companies provide a housing loan ranging from 75 to 90 percent of the property cost, depending on your loan value. So if the property is estimated at Rs 60 lakh by the lender, you can avail a maximum loan of Rs 50 lakh (80% of the property cost for loan amount up to Rs. 75 lakh), subject to your home loan eligibility. If you include a co-applicant with you, his/her income shall be considered by the lender to increase the loan amount. The co-applicant may be a family member such as your adult child, parent or spouse. The remaining payment towards purchase of the property has to be contributed by you. For example, if the cost of the property is Rs 50 lakh and you have been authorized a home loan of Rs 35 lakh, the remaining 15 Lakhs has to be given by you. The best way of checking your eligibility for home loan on your own is by using a housing loan eligibility calculator.
Cost of your Loan- You must consider the cost of your housing loan while assessing its suitability. The cost will include the interest payments, processing fees, administrative charges, prepayment penalties, etc. Preferably your home loan must have zero prepayment charges for floating rate loans. You can also pay a certain nominal fee to convert your loan to a lower rate. Go through the documents carefully and make sure, there are no hidden charges. As per the regulator, it is your right to have all information about fees and charges on the website of the lending company.
EMI/ Pre- EMI- EMI stands for Equated Monthly Installment. This is the fixed amount that you have to pay to the lender each month. It includes repayment of the principal amount and payment of the interest on the outstanding amount of loan.
Pre-EMI is a concept that is applied to under construction properties. In the case of Pre- EMI, you get your loan disburse in stages based on the installment amount, that you need to pay the developer. You are usually required to start paying only the interest on the disbursed loan amount. If you are willing to start principal repayment right away, you may consider to tranche the loan and begin paying EMIs on the cumulative amounts disbursed.
Tenure- Home loans can be approved for a maximum period of 30 years, based on the customer’s eligibility. The longer the tenure, the less burdened you are. For example, for a home loan of 10 Lakhs for a period of 20-year will be applicable at an interest rate of 10.40 percent, so the EMI would be Rs. 9,917. And if we increase the time of loan repayment to 30 years, the EMI falls to Rs. 9,073.
Key Documents- Documents needed for a home loan can be categorized as:
KYC DOCUMENTS- These includes your identity and address proofs like a valid passport, voter ID card, Aadhaar card, etc.
CREDIT/INCOME DOCUMENTS- If you are employed, you will have to present your salary slips of the last 3 months; if you own a business or are self-employed, you can submit income tax returns and the computation of your income of the last 3 years.
PROPERTY DOCUMENTS- These include the agreement to sell, the title deeds, etc. The lender does a due diligence on the property on the basis of these documents. You need to submit the property documents in original to get your home loan approved. Also make sure that the lender offers you safe storage and easy retrieval of your property documents after you repay the loan.
Defaulter- Be regular in paying your EMIs and do not miss on any payments. If the customer misses more than 3 installments, they are subject to legal actions directly without intervention of courts as per the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).