Tips to Consider Before Taking a Home Loan

Law
09-Aug-2023
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Home loans are not just considered one of the biggest financial responsibilities for many, but for most, they even represent the initial commitment to such long-term loans in their lives. It's for this reason that many individuals have a limited understanding of the numerous elements that one must take into account while applying for a home loan.

Securing a home loan is a long-term financial commitment that demands meticulous research and analysis. Here are some tips you should remember before proceeding ahead with any decision:

Tip 1: Grasp Home Loan Eligibility Criteria

Financial institutions that provide home loans always lay out some set of qualification criteria, and applicants who successfully fulfill this criterion are only viewed as prospective borrowers. The initial factor that banks usually check is your credit history to understand your loan repayment tendencies.

If you have a credit score somewhere closer to 900, then it gets easier for you to become a superior home loan customer. Hence, if you are considering taking a home loan, it's essential to first verify your credit score. In case it is less than the suggested number, take all necessary actions to enhance it. This will surely enable you to obtain the finest home loans, at the most favorable interest rates.

Beyond this, your age, income level, occupation, collateral security, and margin requirements also play an essential role in shaping the loan interest you get. Hence, it is advisable to review these factors as well.

Tip 2: Comprehend the Different Types of Home Loans

Banks offer a variety of home loans, all tailored to meet your specific requirements. Some of the main ones are listed below for you:

a. Standard Home Loans: These are the typical home loans that get used for purchasing a house.

b. Home Construction Loans: These loans cater to landowners who are planning to build a home on their already existing property.

c. Home Extension Loans: These home loans are meant for refurbishing or extending currently existing homes.

d. Home Loan Balance Transfer: This option is most suitable for individuals who are already paying off a home loan but wish to shift it to some other lender for improved benefits.

Tip 3: Gain Clarity on Loan Amount Calculation

The loan amount is very critical to consider while planning to take a home loan. While a solid credit score can surely help you acquire a larger loan, it's crucial not to overextend yourself. Remember that home loans are no short-term commitments. Choose only the amount that you feel you can comfortably repay, both today and in the future.

Factor out all your current and future financial commitments before settling on a loan amount. Keep in mind that owning a home is just one part of many other crucial life goals. As you’ll progress, you'll have more responsibilities, which could make monthly installments payment a challenging task.

The monthly installments (EMIs) you pay for your home loan also link to the loan amount. This means the higher the home loan amount you take, the higher the EMI you’ll be giving. Thus, choose a loan that perfectly suits your budget.

Also, remember that the highest loan amount you can think to borrow depends on your income and property value. Lenders will carefully consider your existing financial commitments plus the cash flow before defining the approved loan amount.

Tip 4: Familiarize Yourself with Interest Rates

This factor is of great importance as the interest rate instantly influences your EMI. You can go for a home loan which is either fixed or based on floating interest rates. In the scenario of a fixed rate, the interest stays the same throughout the loan tenure, whereas with the floating rate case, the interest often fluctuates based on market conditions.

No matter what type of interest rate you choose, make sure it's competitive. In essence, choose a lender who can provide you with a favorable interest rate. It's beneficial to make rate comparisons with several lenders and then select one which aligns best with your financial plan. Keep in mind that few lenders offer concessions on provided interest rates for women, so a joint home loan with your partner as a co-borrower can be advantageous.

Tip 5: Learn about EMI and Pre-EMI

EMI, or Equated Monthly Installment, is the monthly payment of a home loan you make to the lender. This payment includes both the repayment of the principal amount and the interest on the left loan balance.

The term Pre-EMI is used when you are dealing with properties still under construction. In such situations, your loan is paid in various stages, according to the decided installment amount you need to pay to the developer.

Typically, you start with paying only the interest rate on the disbursed loan amount (known as pre-EMI interest). If you wish to commence principal repayment right away, you can divide the loan and initiate paying EMIs on the accumulative amounts disbursed.

Tip 6: Understand Loan Tenure Options

This aspect in the case of home loans is often overlooked, but it's essential to keep your eye on the loan tenure. Although home loans are long-term obligations but selecting the suitable tenure is crucial as it can affect the total amount of interest you'll be paying. With a shorter tenure, your EMIs go higher, but the interest you are supposed to pay gets lower.

On the other hand, if the tenure is outstretched, the overall interest paid by you will be higher, thus increasing your total repayment amount. Loan tenure can also affect the eligible loan amount; a longer tenure can yield a larger loan amount but will also inflate the interest cost. Therefore, it's a trade-off that needs to be carefully balanced.

Ensure that you always select a tenure that permits timely loan repayment while also minimizing interest expenses.

Tip 7: Grasp the Concept of a Down Payment

Let's say you have applied for a home loan of around Rs 70 lakhs, but the bank only approved Rs 50 lakhs based on your eligibility. In this situation, you are supposed to contribute Rs 20 lakhs from your funds. This upfront payment is most commonly known as the down payment.

You must target a down payment that you can afford without straining your budget. This will help you reduce the total loan amount. The smaller the loan amount, the less interest you are supposed to pay. Some banks even offer 100% financing of the property value, which depends on your eligibility. However, to minimize interest costs and assure manageable repayment, it's advisable to go for at least a 10% to 20% down payment.

Tip 8: Be Aware of Pre-Payment Charges

Owning a home is a significant financial step for many people in their life, and many have a strong emotional desire to make their home debt-free as soon as possible. Therefore, they try paying off their loan earlier to minimize their debt obligations. Pre-payments can take the form of part-payments, where you are making a bulk payment toward the principal amount, or foreclosure, which involves repaying the full loan amount before the loan tenure even ends.

Making part payments whenever possible can remarkably reduce the amount of interest you were supposed to pay and help to become debt-free sooner. Most banks and housing finance companies are not imposing any pre-payment and foreclosure charges after a certain period or after a specific percentage of the loan is paid off.

However, some lenders charge a fee for pre-payments and even set limits on the number of pre-payments you can make, plus the total pre-payment amount. Therefore, before trying to secure a loan, fully understand all the pre-payment charges and only opt for a lender who permits pre-payments with minimal to no charges.

Tip 9: Pre-Approved Home Loan

If you haven't yet finalized any property, then it's worthwhile to get pre-approval for your home loan. A pre-approved home loan can show you a clear picture of your borrowing capacity, which can support you in better negotiation with property developers. It can also simplify the loan-taking process.

Kindly note that lenders have well-established relationships with numerous developers. Therefore, you can request a list of approved developers in your desired area from banks to discover prime properties at attractive prices.

Tip 10: Understand Documentation

For both cases, i.e. your pre-approved home loans and regular home loans, the lending institution will demand some specific documentation. These documents can be split into KYC documents, income documents, and property documents.

  • a. KYC Documents: These are required for verification of your identity and residential address. Banks and housing finance companies mostly request documents like your PAN Card, AADHAR Card, Passport, Driving License, Voter ID, etc.
  • b. Income Documents: The necessary income documents always differ for salaried individuals and self-employed individuals. Lenders can ask for your last three months' salary slips,  income tax returns, bank statements, computation of income for the last three years, etc., all based on your current occupation.
  • c. Property Documents: Lenders conduct a detailed examination of the property before approving your home loan. Therefore, you need to provide relevant property documents to them, like the sale agreement, title deeds, etc.

Tip 11: Consider Home Loan Insurance

Lenders quite often suggest property insurance because of their vested interest in the asset. For a fairly small annual premium, somewhere around INR 2,000, you can safeguard your INR 50 lakh home against damages caused by situations like natural disasters, which include fires, floods, and earthquakes.

Such insurance policies only cover the building structure, but they can be surely expanded to include the elements of the house depending on the terms and conditions of your insurance agreement.

Likewise, borrowers should even consider covering risks for any outstanding loan liability. It's advisable to purchase term insurance to protect your family from any possible future financial liabilities due to any sort of unexpected circumstances. Most banks and housing finance companies pre-incorporate the insurance premium into their home loan amount. However, you can also consider buying a policy independently.

Tip 12: Carefully Review and Understand Loan Documents

Loan agreements, we agree, are not any light, breezy reading material. Pages filled with dense legal jargon and that too in a small font can put you off. However, it's crucial to dedicate some time and effort to thoroughly read all the terms and conditions to prevent any unforeseen complications down the line.

If the legalese is hard to solve for you, then consider seeking some guidance from a financial advisor or chartered accountant before signing the agreement. Keep in mind that this isn't just some regular text or a topic that you can renegotiate later with the lender. It's a legally binding document that not even the lender can modify after signing.

We agree purchasing a home is a powerful financial and emotional commitment; therefore, you should carefully consider all the factors we have mentioned above. Choose the right type of loan for yourself and the appropriate loan amount too, which does not overburden you in the future.

Additionally, it's wise to do deep, thorough online research before selecting a lender. A Google search can even reveal better offers on interest rates and other fees. However, consult your primary banker also, as they can offer the best deals and services from their end to you.