Guide To Home Loan – Things You Must Know About Your Life's Biggest Financial Decision

Buying a home is one of the biggest financial but important decisions in your life, which can help you to secure your and your family’s future. Buying a home is not only the most important purchase that anyone makes in their lifetime but also a dream come true. Individuals can make an investment in home properties multiple times in their life, but they also will have the benefit of having a tenant who will pay rent on their owned properties, which will support in loan repayments. Nowadays owning a home is a basic necessity and thus availing a home loan is one of the most important finance decisions an individual makes.

However, every individual makes their decision carefully when it comes to their mortgages. But, in reality, too many people make simple mistakes when it comes to their home loans. These simple mistakes can cost you a huge amount of money over your loan tenure. But, that money can be used to increase your wealth and make savings. Thus, it is important to first understand all the basic aspects of a home loan, documents required, eligibility requirements and benefits to avoid these simple mistakes.

1. What is a Home Loan?

Home loan is a kind of loan which is disbursed by a bank or financial institution to an individual for buying a residential property. While some of you might be aware of the following terms related to a home loan, not all will be well acquainted with the same. Thus, while negotiating the documentation, you must have a better understanding of a few technical terms and a few operational details that will come handy to avail a home loan for your dream abode:

1. Principal amount – The principal amount is the loan amount for which a borrower has approached the bank for a home loan.
2. Down payment – Banks require the borrower to contribute a certain amount as down payment while buying a home. The down payment can be in the range of 15 per cent to 30 per cent of purchase price. But, it varies from one lender to another and also depends on the borrower’s credit history/income.
3. Type of interest rates – There are two types of interest rates available for taking home loans: fixed and floating rates.

• Fixed interest rate – Fixed interest rate on home loans remains same for the entire loan tenure irrespective of the market conditions. But, it can prove to be beneficial if market conditions change drastically. For example: If an individual opt for a fixed interest rate and later on the interest rate on home loan is increased then individuals with fixed interest rate will remain unaffected by any change in the market interest rates and their EMI amount will remain the same.
• Floating interest rate – If the home loan interest rate varies periodically over the loan tenure then it is known as floating interest rate. A bank maintains its own MCLR to which existing rates are linked. MCLR of banks are revised with a period of time, which leads to change in the interest payable as well.

4. EMI – EMI is one of the most critical factors that make an influence on the borrower’s mind to take a home loan decision or not. EMI is the monthly outflow of money that will go towards the repayment of your home loan. Experts suggest that any borrower should never let the EMI exceed 40-45 percent of their monthly income.
5. Credit Score – A borrower’s credit score is one of the most important things to consider for a bank or financial institution while checking a borrower’s home loan eligibility and interest rate. The credit score of a borrower means the credit worthiness of the person, which tends to be one of the primary determining factors for home loan approval. A good credit score is one of most important factors for the lender to check home loan eligibility, but it is not the only criteria. Banks and financial institutions prefer borrowers with a credit score higher than 750 as it reflects good credit score.
6. Processing Fee – When applying for a loan, a fee is paid to the lender which is known as processing fee. Processing fees can either be a fixed amount or a percentage of the loan amount.
7. MCLR – MCLR is the new benchmark lending rate introduced by Reserve Bank of India at which banks will now lend money to new borrowers. Prior to this, banks used the base rate as benchmark rate to lend. MCLR is built on four components, which include marginal cost of funds, negative carry on account of cash reserve ratio (CRR), operating costs and tenor premium.

Documents Required for Home Loan

The documents that need to be submitted may vary from one lender to the other. Some of the necessary documents to be submitted are as follows:

• Duly filled loan application form
• Passport size photographs
• Aadhaar Card
• Identity proof – PAN card/Passport/ DL/ Voters ID
• Residence proof – Telephone or electricity bill/ passport/ voter ID/ property tax receipt
• Bank statement for at least past 6 months and salary certificates/ latest acknowledged ITR/Form 16
• Copy of plan approved for the proposed construction/extension
• Cost estimation/ valuation report from Bank’s (or finance company) authorised surveyor/evaluator.
• Allotment letter of housing board/ NOC of the society/Builder etc. as well as any other land use certificate/other

Top 6 Factors Affecting Home Loan Eligibility

1. Age: Age is the first and foremost factor, which a lender/ financial institution consider when one applies for a housing loan. Normally, financial institutions attempt to limit the house loan term according to the primary applicant’s age. For instance, any young professionals (20s and early 30s) can avail a loan with a term of up to 25 years with no trouble. But older applicants especially those beyond 40 can find it tough to be eligible for an extended tenure.
2. CIBIL Report: Banks also scrutinize your credit repayment history from CIBIL (Credit Information Bureau India Limited), which is country’s regulator and first credit information bureau. CIBIL and other credit bureau use your PAN card number to maintain and update detailed records regarding credit history relation between you and various creditors. A negative entry can bring down your eligibility and credit score significantly.
3. Income: Let us categorize this into salaried, professional and self-employed. Whichever category a borrower falls into, a steady and regular source of income is must. Basically, there are fewer risks in providing home loan if the applicant is an earning individual.
4. Rate of Interest: Home finance eligibility is always inversely proportional to the rate of interest. If the rate is more, eligibility will be less and vice-versa.
5. Loan Term: If you opt for a longer tenure, your eligibility will improve. EMIs too will be lesser and manageable. But, you will en d paying up more interest.
6. Outstanding Loan(s): Banks and financial institutions always recommend keeping the EMI to Income Ratio between 50 or 60 percent. This is to leave window for future loans or to pay existing loans if any. But unsettled loans could be a setback on your eligibility.

Disclaimer: This post has been contributed by Paisabazaar.com and News18 doesn’t hold any responsibility for the content.  

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