Real estate is considered a safe and essential investment for most individuals. Property purchases, undertaken either for end-use or for investment purposes, are always looked upon as smart choices. With several financing options readily available to meet these high-ticket expenditures, prospective home loan borrowers can avail of home loans that fit their budget by understanding certain elements that can impact their home loan.
Factors to Consider Before Taking a Home Loan
Housing loan provide a convenient alternative to aspiring home owners when they face a cash crunch or if they do not wish to liquidate their savings. Easy monthly instalments and suitable repayment tenors facilitate a comfortable home buying journey. But before applying for a home loan, one should know the crucial factors that can ease the home loan process, which are as follows:
Credit History
Banks and financial institutions pull up your credit records to establish timely repayments of previous EMIs and to check for defaults. This assures them of your ability to repay the loan within the agreed tenor. A good score above 700 can fetch you better loan deals at competitive rates of interest. On the other hand, if you have a poor score and credit history; you may secure housing finance at higher interest rates along with stringent terms, or you could also face possible loan denial.
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Interest Rates
Housing loan interest rates can greatly impact loan affordability. Even the smallest difference in these rates can increase or decrease the cost of credit. Therefore, when you decide to take up a home loan, compare the rates of different lenders to pick the most suitable lender who can offer the lowest interest rates with attractive loan terms.
Home loans are tendered with two types of interest rates:
- Floating interest rate: The interest rate is calculated on the Marginal Cost of Funds-Based Lending Rate (MCLR), which may change over time with fluctuations in the repo rate. A fall in these rates will reduce the home loan interest rates; while an increase translates into a hike in the loan interest rates.
- Fixed interest rate: Here, the interest rate remains constant over the entire tenor, thus one pays the same EMI sum throughout. This helps borrowers calculate their EMI outgo well in advance and plan their loans effectively. You can choose between the two interest types as per suitability.
Loan Repayment Tenor
The duration of your home loan has a direct bearing on the monthly instalments. If you seek to pay off your loan earlier while restricting the interest component, you can opt for a shorter tenor with higher EMI pay-outs.
At the same time, if you prefer to keep your EMIs within a reasonable range each month, you may go in for a longer tenor. However, the interest component adds up making the loan costlier. In such cases, one can use an online home loan EMI calculator to easily assess and customise the loan tenor, EMI and principal amount based on requirement.
EMI and Down Payment
Lenders may normally extend up to 90% of a property’s value as the loan amount. Borrowers are then required to arrange for the rest of the money as down payment on their own. A heavier down payment essentially reduces your loan principal sum, which reflects in the form of lower EMIs resulting in a lesser interest outgo.
It is generally recommended that your EMI pay-outs should not exceed 45% of your total income. This will ensure that you can utilise the rest of your earnings to take care of your regular expenses and other necessary commitments.
Loan applicants need to submit the relevant documentation as required by the lender. This list may differ with each lending institution, but housing loan documents usually include:
- Proof of income – It may vary depending on whether you are a salaried, professional or self-employed applicant. One will need to furnish income tax returns, bank statements, salary slips, proof of business, balance sheet and so on
- Proof of identity and address – Aadhar card, PAN card, passport, etc.
- Property documents – Tax receipts, valuation reports and other property-related papers
- Liabilities and assets statement
Home Loan Documents
Furthermore, individuals must carefully read the terms and conditions before signing the housing loan documents. One should be aware of the various charges, fees and penalties mentioned therein like foreclosure charges, processing fees, etc.
Eligibility Criteria
Your home loan eligibility is among the most critical aspects that determines home loan approval. Your age, income, job profile, existing liabilities, number of dependents and repayment capacity are huge indicators of loan eligibility. For instance, younger salaried applicants can obtain quicker loan approvals as compared to older ones due to a longer career path ahead. While, salaried borrowers may be preferred over self-employed applicants since they have a regular cash inflow.
Summing Up
In addition to the factors already elucidated, home buyers must also consider the cost of stamp duty and registration, which differs for every state. Moreover, to reduce the debt liability of an existing housing loan, you can go in for a home loan balance transfer by shifting your current loan to another lender for competitive interest rates and terms. Whether you avail of a house loan or a balance transfer, borrowers can enjoy substantial savings through the tax benefits extended on both the principal and interest components of a home loan.
